What is a stock split?

A stock split occurs when a company divides its existing shares into multiple new shares, which increases the number of shares outstanding while proportionately reducing the stock price. This action is often taken to improve liquidity because it makes shares more affordable for a broader range of investors. As a result, even though the overall market capitalization of the company does not change immediately following the split, the lower price per share typically makes it easier for investors to buy and sell shares.

In a stock split, shareholders retain the same proportion of ownership, as the number of shares they own increases while the value of each share decreases accordingly. For example, in a 2-for-1 split, each shareholder would end up with double the number of shares they previously held at half the price per share, maintaining the value of their total investment.

This contrasts with other choices: a reduction in stock price may be an effect of a stock split due to the price adjustment, but it is not a defining characteristic of the split itself. An increase in dividends is more related to the company's profit distribution decisions rather than the mechanics of a stock split. Lastly, an issuance of new shares typically involves raising additional capital and is not the same as a stock split, which merely reallocates existing equity.