When a company incorporates, it issues stock--also referred to as shares--to the owners. In publicly owned corporations, the stock in these companies is publicly traded: It can be bought and sold on a public market, such as the New York Stock Exchange or the NASDAQ market. A stock split increases the number of these shares available for trading, but it does not reduce the equity in the company.

Stock Splits

Stock splits do not reduce equity because when the stock is split, the shareholder receives all the stock that is split. For instance, in a 2-for-1 stock split, a shareholder receives two shares for every share he or she holds. The total value of the shareholder's investment remains the same: twice the number of shares, with the share value halved for future growth.

New Stock Reduces Equity

By comparison, when a corporation issues more stock, it is making more hares available for purchase. Existing shareholders do not receive extra shares. More shares available for purchase means the value of existing shareholder stock will go down, reducing the value of their investment.

A 3-for-2 Split

In a 3-for-2 stock split, the shareholder receives three shares for every two shares owned, or 1.5 share for every outstanding share. For instance, if the shareholder owns 100 shares, he will own 150 shares after the split.

Dividends Adjusted

Dividends are "split," too. If a shareholder was receiving a dollar in dividends for every two shares (50 cents a share), that dollar would be distributed across three shares after the split. In this case, the shareholder would begin receiving 33 cents per share.

Why Corporations Split Stock

The idea behind stock splits is usually to make the corporation's share price more affordable. This will, in theory, generate more activity in the stock, which will help increase the share price. Not everyone subscribes to this idea. Warren Buffett's Berkshire Hathaway has never split its stock. A single share of Berkshire Hathaway "A" stock, as of December 3, 2009, was trading at $99,010.

Source:

The SEC

Dreyfus Glossary - S

Berkshire Hathaway

Resource:

Motley Fools Investing Wiki