When a stock splits, the value of an investor's stock remains the same but in a different proportion. For example, instead of owning 100 shares valued at $20 each (a $2,000 value), someone might own 200 shares valued at $10 each (also a $2,000 value). The most common stock split ratio used by companies that declare a stock split is 2:1, but other ratios, such as 3:1 and 5:4, may also be found. When the share price decreases through a stock split, the stock becomes more affordable to investors.
Stock splits can also work in the opposite direction where investors receive proportionately fewer shares. This is called a reverse split. For example, an investor might own 100 shares of stock valued at $20 a share (a $2,000 value) and have a 1:10 split, where one new share is issued for each original 10 shares. Then he or she would have 10 shares of stock worth $200 each. Again, the value of the stock remains the same, but the share price and the number of shares owned are different.
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