Split = a type of corporate action

Stock split refers to a corporate action that increases the shares in a public company. The price of the shares are adjusted as such that; the before and after market capitalization of the company (= value of the company on the "market") remains the same.

For example, a company has 100 shares of stock each with a price of $50. The market capitalization is 100 × $50 = $5000. The company splits its stock "2-for-1". There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share has been adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split. Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are not unheard of. Sometimes investors will receive cash payments in lieu of fractional shares.

It is often claimed that stock splits in-of-themselves lead to higher stock prices, however, research does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price.

Other effects could be psychological. If many investors think that a stock split will result in an increased share price and therefore purchase the stock, the share price will tend to increase. Others contend that the management of a company, by initiating a stock split, is implicitly conveying its confidence in the future prospects of the company.

A reduced share price may attract more attention from small investors. Small investors such as these, however, will have negligible impact on the overall price.