A stock split is a kind of corporate action which occurs when a company divides the existing shares into multiple ones by increasing the share count without changing the overall value of the stock. The purpose of such action is mainly to lower the trading price of the stock to comfort most investors, thus enhancing the liquidity of the shares. There are two common split ratios: 2-for-1 and 3-for-1. This means that the stockholder can now have two or three shares for the single share that is held earlier.

Here is an example for you to better understand how the stock split works. If a company has 10 million shares outstanding while the shares are trading with $200. The market cap will be 10 million shares x $200=$2 billion. Provided that the board of directors of the enterprise decides to split the stock with a ratio of 2-for-1. Then, after the split, the shares number would double to 20 million, whereas the share price would be halved to $100. This makes the market cap remain the same ($2 billion) as the previous one while more affordable shares can be available for investors.

Why should companies bother to split the stock? On one hand, as is mentioned above, sometimes the stock price is too high to attract potential investors. By lowering the share price via a stock split, the shares can become more accessible, thus greatly facilitating the trading and liquidity. On the other hand, for those average investors, stock split serves as a golden opportunity for them to accumulate the shares of those blue chip companies like Apple or Walmart, which can effectively ignite the passion and the interest of the investors.

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