Stock Split

A stock split is a corporate action that occurs when a company changes the amount of shares it has outstanding and then adjusts each share's price accordingly. The number of shares received as a result of a stock split is a ratio of the total shares you own right after the split.

Stock splits are usually non-taxable. It is important to note that after a stock split, the number of shares you own in the security and the cost basis of those shares will change. Often stock splits are expressed as a fraction. A two-for-one stock split is the most common - the investor receives one additional share for every share owned in the security.

Example of a Stock Split

Nancy buys 20 shares of ABC Corporation on April 1 for $200 ($10 per share). On June 1, ABC announces that it's splitting its stock two for one as of July 1. As of July 1, Nancy will own 40 shares of ABC stock rather than 20 shares. Assuming that the stock is still trading on the market for $10 per share as of June 30, on July 1 each share will be trading for $5 per share. Therefore, Nancy still owns $200 worth of ABC stock (40 shares x $5 per share = $200) even though she now owns 40 shares rather than 20 shares.