Stock Split Definition

This Stock Split Definition (also known as capitalization) issue will give you an idea about what they are and how they might affect any position you would have.

So happens when a stock splits is the price of the stock is lowered and the investor gets more shares to cancel it out. So for example a 2 for 1 split means that the price of the stock will be cut in half, and the amount of shares an investor has will be doubled.

So if you have 100 shares of a stock trading at $90 and that stock has a 2 for 1 split you would own 200 shares of a $45 stock instead. If they did a 3 for 1 split you would own 300 shares of a $30 stock and so on.

What Happens to Options?

What happens to options when a stock split is similar to what happens with stocks. You get more contracts, but they are at a lower strike price.

For instance if you own an $80 call option on an $84 stock and it has a 2 for 1 split you now own two $40 calls on a $42 stock.

Does it affect the Price Movement?

It should not play a major role in price movement, but it has been suggested. Many people believe that a stock splitting shows a growing company and will most likely continue to grow. This has been proven to hold some truth in the past.

One study found that between 1975 and 1990 stocks that had a 2 for 1 split tended to outperform the overall market by 7.9% after a 1 year period and 12.2% after a 3 year period.

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