What does a stock split mean?
How do investors benefit from stock splits and why do companies do it?

Reasons why companies split their stock.
The stock split process helps increase a stocks competitiveness.
A stock split occurs when a company increases its number of shares to enhance liquidity. The company divides its shares into smaller parts based on a specific split ratio. For example, if a company announces a 4-for-1 stock split, a shareholder with one share will now have four shares. If the stock price was around $100 before the split, each share will be approximately $25 after the split.
The company's management decides to split the stock, converting each existing share into a predetermined number of shares. Consequently, the price per share decreases. However, it's important to note that a stock split does not necessarily mean increased profits upon distribution, as splitting the nominal value of the shares does not impact the total cash dividends.
Why Do Companies Split Their Stock?
- Increasing the stock’s competitiveness
As the price of a company's stock rises, demand for those shares may decrease due to reduced competitiveness compared to lower-priced stocks. By splitting the stock, the company aims to support demand and enhance its competitiveness in global markets. - Attracting small investors
When a company's stock price is high, it primarily attracts large investors, leading to relatively low trading volumes. Splitting the stock reduces its price, making it more appealing to small investors and short-term traders, who play a significant role in global market trading. - Higher levels of liquidity
The more shares available in the market, the higher the liquidity. Increased share volume leads to more trading activity, resulting in greater overall liquidity. - Trader's psychology
From a psychological perspective, a stock split can signal success to traders, making them feel they might miss out on opportunities. For example, if a stock has previously risen significantly and a trader missed out, they may decide to buy after a split, perceiving it as a renewed opportunity to enhance their profits.
When Does a Stock Split Occur?
A company may opt to split its stock after achieving consistent growth over several years. As demand for its shares continues to rise, the company may decide to split its stock, reflecting increased confidence in its sustained strong performance.
Stock Splits as a Buying Opportunity
Many traders view a stock split as a good investment opportunity. A company's decision to split its stock often indicates strong performance and continuous profitability over the past years, making it an attractive buying and investment opportunity.
Investors frequently take advantage of stock splits to buy shares at lower prices, expecting the stock to continue its upward trend. For example, the tech giant Microsoft has split its stock about nine times from the late 1980s to the early 2000s. Similarly, Tesla has split its stock twice since 2020.