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What is a stock split and a reverse stock split?



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A stock split is when the board of a company approves to divide the shares it already has into more shares. The total number of outstanding shares increases and the price-per-share drops, but the dollar value of the outstanding shares (the value of the company) stays the same. The primary motive to do this is to make shares seem more affordable for investors even though the underlying value of the company has not changed. This has the effect of increasing liquidity in the stock.

A reverse stock split is the opposite process, merging shares it already has into fewer shares. A company will decide to perform a stock split to decrease the number of shares outstanding, which leads to a price-per-share increase. In both cases, the total value of the shares an investor holds remains the same.

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