You may have heard the term "stock split" in investing news before, but what exactly is it? Yahoo Finance's Brad Smith breaks down the term, how it works, and why companies do it.

A stock split is when a company divides up each share of its stock into a set amount of shares. When a company does a stock split, it increases the amount of outstanding shares and therefore, increases the liquidity of a stock. It also helps lower the stock price, which makes it more accessible to investors.

Key video moments:

00:00:05 - What is a stock split?

00:00:11 - Stock split example

00:00:38 - Stock split process

00:00:51 - Why would a company do a stock split?

This post was written by Mariela Rosales.

Video Transcript

What happens when a company divides up each share of its stock into a set amount of shares.

So for example, here, if you own one share of Brad dot A I TB R ad worth $300 and then the company run by mo announces a 3 to 1 stock split that would leave you with three shares worth $100 a pop each.

The market cap of Brad's company remains unchanged since the value of each investor's holdings that remains the same, the big difference to the investor, you now own three shares instead of just one, the company sets the day on which the split will happen.

And at the close of the trading day, all investors holding the stock will have their shares converted and then the stock starts trading again on this new split adjusted basis.

Same ticker though, why would a company do this?

Doing a stock split, increases the number of outstanding shares or shares owned and thus increases the liquidity of the stock making it easier for buyers and sellers to trade.

Lowering.

The share price also makes it a little bit more accessible to investors from our earlier example Brad dot A I shares were originally $300 but went through a three for one stock split, making each share worth $100.

If you have today, $100 max to spend on the stock, you can now afford one share of Brad dot A I, you wouldn't have had enough money to buy the stock when it was at 300 bucks a share unless you're getting into fact, certain trading and we won't go down that route.

But anyway, overall stock splits make ownership more accessible to a wider array of people.