When I first started investing, I heard the term stock split and immediately thought, Great… another thing I don’t understand. I imagined something complicated, maybe even a bad sign, like a company falling apart or going through some big shake-up.
Spoiler alert: It’s actually not that scary.
In fact, stock splits are one of the more beginner-friendly topics in investing—once you break it down. So if you’ve ever wondered what is a stock split and how it affects beginners, don’t worry. I’ve got you.
In this article, I’ll explain what a stock split actually is (in plain English), why companies do it, how it impacts your investments, and whether you, as a beginner, should care. (Hint: You probably should—but not for the reason you think.)
What Is a Stock Split?
Let’s start with the basics.
A stock split is when a company divides its existing shares into multiple new shares. The total value of your investment doesn’t change, but the number of shares you own increases, and the price per share decreases.
Think of it like this:
Imagine you have a pizza (yum). It’s sliced into 4 big pieces. A stock split is like cutting those 4 slices into 8 smaller ones. You still have the whole pizza—just more slices.
Common Stock Split Ratios
Some of the most common stock splits include:
- 2-for-1 split: You get 2 shares for every 1 you owned. Share price is cut in half.
- 3-for-1 split: You get 3 shares for every 1. Share price drops to a third.
- 10-for-1 split: Yes, this happens too! You get 10 shares for every 1 you had.
Let’s say you owned 1 share of a company at $300. After a 3-for-1 split, you’d now own 3 shares at $100 each. You still have $300 worth of stock—just divided differently.
Why Do Companies Do Stock Splits?
Now you might be wondering, “Why would a company do this if the value doesn’t change?”
Here are a few solid reasons:
1. Make the Stock More Affordable
When a stock price gets really high (think $500 or more), it can scare off new investors—especially beginners. A split brings the price down and makes it feel more “buyable.”
Example: In 2022, Amazon did a 20-for-1 split. Its stock went from over $2,000 to around $100—way more accessible for everyday investors.
2. Increase Liquidity
More affordable shares usually mean more people buying and selling, which boosts trading volume and liquidity. That can help stabilize the market for that stock.
3. Signal Confidence
Some companies use stock splits to show they’re doing well and expect continued growth. It’s often seen as a positive sign.
What Is a Reverse Stock Split?
Okay, time for a quick heads-up: not all stock splits are happy news.
A reverse stock split does the opposite. It reduces the number of shares you own and increases the price per share. Companies do this when their stock price is very low—often to avoid being delisted from an exchange or to look more appealing.
Example: If you have 10 shares worth $1 each, and the company does a 1-for-10 reverse split, you’ll now have 1 share worth $10.
Reverse splits can be a red flag. It doesn’t always mean trouble, but it’s worth doing your research if you see one happen.
How a Stock Split Affects Beginners
Here’s the big question: Does a stock split matter if you’re a beginner?
Short answer: Yes—but not in the way you might think.
Let’s break it down.
You Own More Shares, But Nothing Changes (Technically)
After a split, you’ll log into your investing app and see more shares than before—but your total investment value stays the same.
When I first saw this happen in my account (thanks, Apple), I was confused. I thought, “Whoa, my shares doubled—did I just make a bunch of money?”
Not quite.
It’s like getting change for a $20 bill—you now have four $5 bills instead. Same money, different format.
It Might Make the Stock More Attractive
If a stock goes from $300 to $100 per share after a split, more people—especially beginners—might buy in. That increased interest can push the stock price up over time.
Next Article To Read: How I Started Investing in Index Funds as a Beginner