What does a stock split mean?

A stock split doesn’t increase the value of your investment — at least not directly. For example, if you own 100 shares of a stock that trades for $ 80 and it splits 2for- 1, you’ll own 200 shares with a value of $ 40 each after the split is completed. The total value of your investment is still $ 8,000.

Having said that, the primary motivation for a company to split its stock in most circumstances is to maintain a share price in a certain range, which helps keep the stock affordable to smaller investors and allows people to invest more of their money.

Let’s say you have $ 1,500 and want to buy shares of Amazon. com, which costs about $ 968 per share as I write this. At the current share price, you could afford to buy only a single share, leaving $ 532 of your money uninvested.

But if Amazon were to split its shares 10- for- 1, its share price would drop to $ 96.80, and each share would represent one- tenth of the equity it currently does. Your $ 1,500 can buy 15 shares, which would leave $ 48 of your money on the sideline.

I don’t think Amazon will necessarily split its stock anytime soon, but if it did, it would allow smaller investors to put more of their money into the company.

This can ( and often does) create buying pressure on a stock after it splits and causes the price to rise as investors can put more of their money into the stock.

The bottom line is that although a stock split won’t technically give you more equity in the company, it can result in a boost in the share price.