A corporate action that divides existing shares into multiple new shares, reducing the price per share proportionally while keeping total market value unchanged.
In a 2-for-1 stock split, each shareholder receives 2 shares for every 1 held, and the share price halves. If you held 100 shares at USD 200, you now hold 200 shares at USD 100 - the market value is unchanged. Companies split their stock when the price has risen to levels that may deter smaller investors or reduce liquidity (a common threshold is when prices exceed USD 500–1,000). Apple has split its stock five times since its 1980 IPO.
Reverse stock splits reduce the number of outstanding shares and raise the price proportionally: a 1-for-10 reverse split turns 1,000 shares at USD 2 into 100 shares at USD 20. Reverse splits are typically defensive: companies facing delisting risk due to a price below exchange minimums (e.g. NASDAQ minimum USD 1 bid price) execute reverse splits. They are usually bearish signals because they occur after substantial price declines.
The market impact of forward stock splits is usually positive in the short to medium term - not because splitting creates value (it doesn't), but because it signals management confidence in continued stock appreciation and broadens the retail investor base. Some research suggests that stocks in the S&P 500 that execute splits outperform the index in the 12 months following the split, possibly due to the positive sentiment signal and increased retail participation.
Worked Example
Company announces a 10-for-1 stock split effective June 10. Current price: USD 500. Post-split price: USD 50. A shareholder with 10 shares (value: USD 5,000) now holds 100 shares (value: USD 5,000). A retail investor who could not afford a USD 500 share can now buy at USD 50. A long call option with a USD 500 strike converts to 10 call options with a USD 50 strike each covering 100 shares.