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In a stock split, the number of shares outstanding increases and the share price becomes a fraction of the pre-split price.

For instance, in a two-for-one Stock split the number of shares outstanding is doubled. Each existing shareholder receives new stock that doubles the number of shares he owns. Since every other shareholder also receives more stock, each shareholder has the same stake in the firm as before the split. The value of each share of stock falls (in this case by half) on the split date.

The split date is the date on which the stock split takes effect.

The ratio by which a corporation's number of outstanding shares of stock is adjusted on the split date is called the split ratio. In the example above, the split ratio is 2.

Another common way to split a stock is 3-for-2, in which case the split ratio is 1.5.

Stock options are split-protected when the number of shares under option increases by the split ratio and the strike price of each option is reduced by dividing it by the split ratio on the split date. The strike price therefore depends on the history of stock splits since the grant date. The exercise price adjusted for splits is called the split-adjusted strike.

Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
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was last updated on Tue, Aug 21, 2018.
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