A stock split is when a company allows investors to own more shares for a lower value per share in order to make the share price less expensive on a pure dollar basis.
The idea is to make it easier for the average investor — who may have limited cash — to buy the stock.
So does the company just give investors more shares? The answer is basically yes. Here’s how it works.
For every one share investors own, they will receive a set number of new shares. The new price per share, multiplied by the new number of shares, will equal the same value as one previous share.
Apple (AAPL) - Get Report recently completed a 4-for-1 stock split. So for every share Apple investors owned, they received four shares at one quarter of the previous price each.
If a share of Apple is $500, then the new share price is $125, one-fourth of the price.
But don’t forget, Apple didn’t change the value of the company -- that’s up to the market. Apple’s market capitalization, which is the share price multiplied by the number of shares outstanding, is still $2.1 trillion. It’s just that the $2.1 trillion is distributed across more shares, making the price more affordable for those who aren’t running a big hedge fund with millions of dollars in cash.
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