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What is the purpose of a company splitting? E.g I have stocks worth 2.00 per share, and next day I find out that I have gain 800% in my account before the market opens.

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    Welcome to money.se, please stop typing in all caps. – JoeTaxpayer Apr 19 '16 at 21:08
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    Your example makes no sense to me. – edocetirwi Apr 19 '16 at 21:18
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Stock splits are typically done to increase the liquidity of stock merely by converting every stock of the company into multiple stocks of lower face value.

For example, if the initial face value of the stock was $10 and the stock got split 10:1, the new face value of the stock would be $1 each. This has a proportional effect on the market value of the stock also. If the stock was trading at $50, after the split the stock should ideally adjust to $5. This is to ensure that despite the stock split, the market capitalization of the company should remain the same.

Number of Shares * Stock Price = Market Capitalization = CONSTANT

  • Thanks John, but kindly explain to me what "increase the liquidity of stock" means. – LanzOluz Apr 19 '16 at 21:38
  • Liquidity implies how easy it is to buy or sell that stock. Ease of buying or selling comes from the volumes of shares traded of that stock in a trading session. More the number of traded shares, more the liquidity. When companies split a stock, every shareholder who was originally owning 1 stock, later starts owning 10 stocks (in this example). Because shareholders have more number of stocks, the number of stocks traded on the exchange automatically increase. ** Liquid stocks are considered more attractive by many investors. – John Locke Apr 19 '16 at 21:41
  • Please mark it as a correct answer to help others in the community. – John Locke Apr 19 '16 at 21:52
  • How do I do that, please? – LanzOluz Apr 20 '16 at 11:23
  • Oops, you may not have enough points on the forum to mark answers as correct. – John Locke Apr 24 '16 at 4:37

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