Stock Split Law and Legal Definition

When a company declares a stock split, the price of the stock will decrease, but the number of shares will increase proportionately. A stock split does not affect on 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 is too high to attract smaller, individual investors. 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. Another type of split, though much less common, is a reverse split. In a reverse split, a company takes shares from investors, but then increases the price of the stock to keep your market value the same. Reverse splits are generally done on extremely low-priced stocks so that the price will be raised to a level that large institutional investors will be attracted to it.