There are two types of stock splits -- and in my view, two types of companies that perform stock splits. First is the reverse stock split, in which a company consolidates shares of stock to raise the price. In a 1-for-10 stock split, someone who has 10 shares of a stock suddenly has one share, and the value is now 10 times what the share price was pre-split. That way, the investment's total value doesn't change.

Those are the kind of splits that troubled companies perform. They're usually just a cosmetic effort to keep the share price above $1 to confirm with listing requirements of the New York Stock Exchange or the Nasdaq, and either way are a huge red flag.

Then there's the forward stock split, in which a company multiplies the shares an investor holds but reduces the price accordingly. So in a 3-for-1 stock split, a share valued at $600 would drop to $200, but you have three shares for every one that you had before the stock split.

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Source Fool.com