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Stock splits are a common occurrence in the financial world. Companies that split stocks have different reasons for the action, but the decision does not affect individual ownership interests.
Ownership Interest
According to Investopedia, "A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders." A stock split does not affect an investor's total ownership value, only the individual share price.
Reverse Stock Split
Unlike a normal split, with a reverse split an investor receives a reduced number of shares at a higher price. The original ownership interest remains the same under both circumstances.
Why split?
Sometimes reverse splits are issued when a company believes its share price is too low to attract new buyers. Other times, when a company sees its share price climb too high, or higher than other companies in its industry, it issues a stock split to reduce individual share prices.
Example
Miss Investor owns 40 shares of stock "A" at $55.50 each, total value $2220. The company declares a 3-for-2 stock split. After the split Miss Investor owns 60 shares at $37.00 each, total value $2220.
Bottom line
Splits make stocks more affordable to individual investors and provide greater liquidity in the market.
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