What is a Stock Split and why would a company do this?

"A stock split is a corporate action in which a company issues additional shares to shareholders, increasing the total by the specified ratio based on the shares they held previously. Companies often choose to split their stock to lower its trading price to a more comfortable range for most investors and to increase the liquidity of trading in its shares.

Most investors are more comfortable purchasing, say, 100 shares of a $10 stock as opposed to 1 share of a $1,000 stock. So when the share price has risen substantially, many public companies end up declaring a stock split to reduce it. Although the number of shares outstanding increases in a stock split, the total dollar value of the shares remains the same compared with pre-split amounts, because the split does not make the company more valuable.

A company's board of directors can choose to split the stock by any ratio. For example, a stock split may be 2-for-1, 3-for-1, 5-for-1, 10-for-1, 100-for-1, etc. A 3-for-1 stock split means that for every one share held by an investor, there will now be three. In other words, the number of outstanding shares in the market will triple."

-Source: Hayes, A. (2023, April 24) What a Stock Split Is and How It Works, With an Example. Investopedia. (https://www.investopedia.com/terms/s/stocksplit.asp)

What is a Reverse Stock Split and why would a company do this?

“When a company completes a reverse stock split, each outstanding share of the company is converted into a fraction of a share. For example, if a company declares a one for ten reverse stock split, every ten shares that you own will be converted into a single share. If you owned 10,000 shares of the company before the reverse stock split, you will own a total of 1,000 shares after the reverse stock split.

A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade."

-Source: Reverse Stock Splits. Investor.gov. (https://www.investor.gov/introduction-investing/investing-basics/glossary/reverse-stock-splits)

How does my cost basis change with a stock split?

"Stock splits don't create a taxable event; you merely receive more stock in the case of a forward stock split or less stock in the case of a reverse stock split, evidencing the same ownership interest in the company that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock.

For example, you own 100 common stock shares of ACB Corp that you purchased for $2 per share for a total cost or overall basis of $200. In a 2-for-1 reverse stock split, ABC Corp reduces all outstanding common stock shareholder positions by 50% or for each 2 common stock shares owned prior to the split, you will receive 1 post-split common stock share. You now own 50 shares, but your total overall basis is still $200. Following the stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split. Your basis per share is now $4.00 ($200 divided by 50)."

-Source: (2023, June 15) Frequently Asked Questions: Stocks (Options, Splits, Traders). IRS.gov. (https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/stocks-options-splits-traders/stocks-options-splits-traders-7)