Market Definitions What is a Stock Split?

If you’ve recently begun to get involved with things like investment opportunities and trading, then you might have heard a few unusual terms along the way. For instance, there are words like market cap and penny stocks to become familiar with. Plus, there are various kinds of security that you might decide to spend your money on too. One of the terms that’s often confusing for beginners is stock split. Before you get carried away with things like classes where you can learn how to day trade with Warrior Trading for short-term investments, it’s worth getting an idea of what this phrase means, and what it could do to your portfolio. 

Defining the Stock Split

Essentially, a stock split is a process that happens when a business decides to split one share of its stock into various other shares. This might mean that one asset becomes two, and so on. Because the new price of the assets will connect to the number of investment options available, the value that the shareholder has won’t change. Additionally, the market cap for the business remains the same. You may be wondering why a business would engage in this kind of activity if it doesn’t do anything to shareholders. 

The simple answer is that the business wants to reduce the individual price of each share. This can sometimes make the stock of a business more appealing to a wider range of investors who might not be able to afford more expensive assets. If you own securities with a particular business and they split, it’s important to remember that you will have the same amount of cash invested into that opportunity, but you’ll also have a larger number of shares. The price you can sell each individual option with on the market will also reduce, however, so it’s important to keep this in mind when you’re selling and learning day trading strategies.  

Can Splitting Scenarios Vary?

Although the most common splits happen in a traditional format, such as turning one asset into two or three, for instance, there are scenarios that can be a little more complicated. For instance, you might see the occasional 3 for 1 or 2 for 1 split. A common example of this unusual process comes from Apple who split their offering in a four-for-one solution in August 2020. This meant that the people who owned one of the shares for the company suddenly owned four. The division of the assets in 2020 for Apple wasn’t the first time that the company has increased the number of purchasing options available for its shareholders. Back in 2014, the company went even further with this strategy in a seven for one division. 

The process seems to be quite common among startups, technology companies and other innovators that want to attract new people in the market with more accessible prices. Companies like Tesla have taken similar approaches in the past. On the other hand, there are businesses out there that refuse to move beyond their whole status. For these businesses, an alternative may be to create a dual-class structure.