What is a stock split and how does it work?

Nvidia will start trading today around 120$ after the 10:1 stock split. Let’s see what is a stock split and how it works.

In order to
increase the share’s liquidity and make it more affordable, a corporation may split its existing shares
into many shares, a move known as a stock split. Because the
split adds no actual value, even though the number of shares outstanding rises,
the shares‘ total dollar worth stays the same. In essence,
a stock split results in an increase in the company’s share count but also a corresponding decrease in share price.

How does it work?

  • Announcement:
    A stock split with a specified ratio (such as 2-for-1, 3-for-1, etc.) is
    announced by the corporation.
  • Change of
    Share Count: The split ratio is multiplied by each shareholder’s share count.
  • Share Price
    Adjustment: The split ratio is used to divide the market price of the shares.
  • Market
    Capitalization: Following the split, the company’s overall market
    capitalization stays the same.

Let’s see an example with Nvidia’s 10-for-1 stock split:


  • A
    shareholder has 100 shares.
  • A share costs $1200.
  • Shares
    total worth is equal to 100 shares * $1200, or $120,000.


  • A 10-for-1
    split is announced.
    are divided from each share.
  • Now, the
    shareholder has 1,000 shares.
  • One share
    now costs $120 (1200 / 10).
  • Shares
    total worth is equal to 1000 shares * $120, or $120,000.

What makes
the stock split historically positive?

Sign of

splits are usually announced by companies after a major increase in share
price. This could be seen as an indication that the business is optimistic
about its chances for future growth.


The number
of outstanding shares rises when the stock is split, which may enhance
liquidity. More shares at a reduced price could draw in more investors, even
retail ones who might have been crowded out previously.


share prices may increase demand by making the stock seem more accessible to
small investors. Investors may view a company priced at $50 as more affordable
than one priced at $200, despite the fact that the stock’s fundamental remains the same.


evidence shows that stocks often do well after a split, owing to increased
investor interest and psychological impact. This can result in a
self-fulfilling prophecy in which growing demand drives prices upward.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Go to Forexlive

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