The division of the outstanding shares of a corporation into either a larger or smaller number of shares, without any immediate impact in individual shareholder equity. For example, a 3-for-1 forward split by a company with 1 million shares outstanding results in 3 million shares outstanding. Each holder of 100 shares before the split would have 300 shares worth less, although the proportionate equity in the company would stay the same. A reverse split would reduce the number of shares outstanding, and each share would be worth more.
When a company increases the number of shares outstanding by splitting existing shares. A 2-for-1 split means every stockholder gets two new shares for each one he or she owns, and a 3-for-2 split means each stockholder gets three shares for every two he or she owns. The price of an individual share falls, but stockholders do not lose money because they are being given the equivalent number of new shares. In a reverse stock split, a company reduces the number of the shares outstanding by consolidating existing shares. A 1-for-5 reverse split, for example, means for each five shares owned, the stockholder receives a single new share instead. The new share's price is five times higher but only to reflect the shortened supply. If a company's stock is trading at a very low price, this process makes the company look more attractive to investors.