A stock split changes how a company balances its common stock in two ways. It increases the number of outstanding shares and it reduces the price of any single share. The total value of all shares, however, remains unchanged after the split. The change in the stock account balance depends on the ratio of the split. At a high ratio, the company may attract many new investors who can afford the cheaper shares, broadening its shareholder base and reducing stock volatility.
Step 1
Multiply the initial number of outstanding shares by the first number in the stock split ratio. For example, if a company that has issued 10,000 shares implements a 3-for-2 split on its stock, multiply 10,000 by 3 to get 30,000 shares.
Step 2
Divide this altered number of shares by the second number in the stock split ratio. Continuing the example, divide 30,000 by 2 to get 15,000 shares. The company will have issued 15,000 shares after the split.
Step 3
Subtract the initial number of shares from this value. Subtracting 10,000 from 15,000 gives 5,000, which is the number of new shares that the company must issue.
Step 4
Multiply the stock's initial price by the initial number of outstanding shares. For example, if the shares initially each sell for $30, multiply 10,000 by $30 to get $300,000. This is the company's market capitalization before and after the split.
Step 5
Divide the market capitalization by the total number of shares after the split. With this example, divide $300,000 by 15,000 to get $20. This is the stock price after the split.
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Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.