How does a stock split work?

Question

How does a stock split work?

Answer 1

Break a pencil in half and ask: do I have two pencils or one pencil still?

Answer 2

Suppose you have 100 shares of stock selling at $90 per share.  - If the stock splits 2 for 1 -  you have 200 shares sell at $45 per shares.  If your stock is held in a brokerage account, the extra shares will appear on your next statement.  If you own paper certificates, you may be sent another certificate or the additional shares  may be held in Electronic form.  

Many people like to buy stock in round lots of 100 shares. At one time, the commission structure made it more efficient to do so - but these days, with low discounted commissions, it doesn't make much difference - Still many people like to buy at least 100 share at a time, and the ability to buy 100 shares  for $4,500 rather than $9,000 may be more attractive to some people -    Stock splits may also have other psychological effects -  Investors tend to assume the company is doing a well if the stock splits - so the stock may rise after the split.

There is also something called a reverse split  Suppose you have 1000 shares of a stock selling at $2 per share.  This does not look good, and so the company may change your 1000 shares to 100 shares selling at $20.

If you trade in options, the number of option contracts and strike price  will be adjusted to account for a split or reverse split.

Stock splits have no effect on the company's price to earnings ratio - (The price per share divided by the earnings per share, because the split causes both to change in the same ratio).

Answer 3

The number of shares changes by some multiple, and the price per share changes by an inverse multiple. In the commonest case, a 2:1 split, investors end up with twice as many shares worth half as much each. It's simply a corporate ploy to make shares look more affordable by lowering the stock's price-to-earnings ratio.