Stock Market

Penny Stock

When a corporation wants to increase the number of shares of stock available it will do so via what is known as a stock split. The end result of a stock split is to increase the total number of shares available while keeping the market capitalization the same. The action is similar to making change for a twenty dollar bill. If you have a twenty dollar bill and I give you two ten dollar bills, you have the same amount of money, but now you have two bills rather than one. I could give you four five dollar bills, or even twenty one dollar bills, the net result is the same—the value hasn’t change, only the number of bills you have has changed.
The same thing happens with a stock split. If a corporation currently has two billion shares of stock at a current selling price of $20 per share they have a market capitalization of 2,000,000,000 x $20 = $40,000,000,000. Now if that company executes a 2-for-1 stock split they now have four billion shares of stock at a new current selling price of $10 per share. So what happens to their market capitalization? It remains the same; 4,000,000,000 x $10 = $40,000,000,000. The only things that have changed are the number of shares available and the current selling price for each share.
What impact does this have for the shareholder? A stock split will have zero impact on the valuation of the shares you hold, but it will change then number of shares you hold and the value of each share.  Some experts see no advantage of a stock split to an investor.
There are also reverse stock splits, in which a company may convert many shares into a single share. For example a company that has 2,000,000,000 shares at $20 per share may decide to execute a 1-for-10 reverse stock split. This will reduce the number of shares available to 200,000,000 with a new current selling price of $200 per share.