Forward Stock Splits: When a company declares a stock split, the price of the stock will decrease, but the number of shares will increase proportionately.
For example, if you own 100 shares of a company that trades at $100 a share and it declares a two for one stock split, you will own a total of 200 shares at $50 a share after the split. A stock split
has no effect on the value of what shareholders own. If the company pays a dividend, your dividends paid per share will also fall proportionately.
Companies often split their stock when they believe the price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. By reducing the price of the stock,
companies try to make their stock more affordable to these investors.
Although many stock splits are two for one, companies can split their stock in any number of ways, including three for one, three for two, and so forth. A stock that has split in the last 52 weeks
will be identified in newspaper stock columns with an "S" next to the company's name.
Reverse Stock Splits: A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it
declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own. Companies often split their
stock when they believe the price of their stock is too low to attract investors to buy their stock. Some reverse stock splits cause small shareholders to be "cashed out" so that they no longer own
the company.s shares.
A company's board of directors may declare a reverse stock split without shareholder approval. Although the SEC has authority over a broad range of corporate activity, state corporate law and a
company's articles of incorporation and by-laws govern reverse stock splits.
If a company is required to file reports with the SEC, it may notify its shareholders of a reverse stock split on Forms 8-K, 10-Q and 10-K.