When a company wants to adjust the price of its stock without affecting the value, a stock split is initiated. A stock split is performed by increasing the amount of the company’s outstanding stock. The shareholders are given extra shares for every one share that they hold. When a stock price becomes too high, a company’s board of directors issue stock to reduce the price of a single share. The company specifies how much of increase in shares the shareholder can expect. This increase in the amount of outstanding shares decreases the price of a single share.

Keeping the price of a stock down seems counterintuitive in a business where profits are very important. However, a company’s goal is to get investors to buy shares of its stock. When the price becomes too high—this means a price higher when compared to other companies in the same industry or a record high for that specific company—investors tend to act like retail customers and will not buy. Essentially, the investor is looking for a bargain and such a high price is not that bargain.

Thus, the need to keep a price low is actually a device to drive more investors to buy shares. After a split, the price is lower than before—a perceived bargain. In addition, a split signals growth in the company. The thinking is that the company’s success drove their prices so high that they were forced to cut it down.  A reverse stock split decreases the number of the company’s shares outstanding.