A stock split is when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company’s market value. It’s akin to cutting a cake into smaller slices; you end up with more pieces, but the total amount stays the same. For instance, in a two-for-one split, an investor who owned one share priced at $100 would end up with two shares, each worth $50 but with the same total value. Stock splits are a way a company’s board of directors can increase the number of shares outstanding while lowering the share price. It’s a tactic for making a stock more attainable to smaller investors, particularly when its price has ratcheted sky-high over time. The split increases the number of shares outstanding, but the company’s overall value does not change.
- A reverse stock split is when a company reduces its outstanding shares by combining multiple shares into one, resulting in a proportionally higher price per share.
- The day after the stock split, the price had increased to a high of $95.05 to reflect the increased demand from the lower stock price.
- Exchange-traded funds let an investor buy lots of stocks and bonds at once.
- Meanwhile, reverse splits are often used to avoid delisting or improve institutional appeal.
After the split, they will owe 200 shares (that are valued at a reduced price). If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender. A stock can be split in as many ways as a company chooses, supplemented with ratios such as “2-for-1,” “3-for-1,” all the way up to “100-for-1.” All this tells you is how much one share is now worth.
Calculating the cumulative effect of a company’s stock splits over time begins by identifying each split event to determine its impact on share count and price. Then you apply each split ratio consecutively to the original share count. For example, if a company has find transposition errors before they turn into a bigger issue had a two-for-one split followed by a three-for-one split, the original number of shares would be multiplied by six (2 × 3).
If an investor has 100 shares at $20 for a total of $2,000, after the split, they will have 200 shares at $10 for a total of $2,000. Though the split reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market capitalization of the company stayed the same (at approximately $131 billion). This may sound complicated, but it’s quite simple in real-world situations. On the morning of the effective date of a stock split, the increased number of shares will appear in your account, and the share price should be adjusted accordingly. Companies split their stock for a variety of reasons and in a variety of ways.
For example, when a company decides to split its shares in order to make shares more affordable, it can have a positive effect. This opens the stock to an entirely new subset of the investing public (namely, those who previously couldn’t afford even a single share), which can cause a spike in demand that pushes the stock higher. If your broker allows you to trade fractional shares, this isn’t a concern, but, for many investors, high-dollar stocks are inaccessible. Stock splits also can convey management’s confidence in a stock price, which can trickle down to investors.
Boosting liquidity (ease of trading)
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Calculating the Stock Splits in a Company’s History
For example, a single pre-split AAPL share in 1987 would have eventually been split into 224 shares after the 2020 split. Stock splits will not make you rich directly, but they can increase demand for shares, causing them to rise in value over the long-term. If a company announces a 2-for-1 split, the number of shares doubles, so the original pie will be divvied up into 16 slices.
More shares, lower price
Mutual funds can undergo splits, but they work differently than individual stock splits and occur less frequently. Mutual fund splits typically occur when the price per share is too high, making the fund less accessible to smaller investors. In a mutual fund split, the number of shares an investor owns increases while the net asset value per share decreases proportionally, just like a stock split. While a split, in theory, should have no effect on a stock’s price, it often results in renewed investor interest, which can positively affect the stock price. While this effect may wane over time, stock splits by blue-chip companies are a bullish signal for investors. Some may view a stock split as a company wanting a bigger future runway for growth; for this reason, a stock split generally indicates executive-level confidence in the prospect of a company.
Related investing topics
Normally, a stock split will reduce the price per share of each share in proportion to the increase in shares. While splits may lead to short-term price movements and increased trading, they don’t change a company’s underlying worth or an investor’s proportional ownership. Investors should focus on a company’s fundamental business prospects rather than being swayed by the cosmetic changes of a stock split.
This, in turn, can increase the value of the shares over the long run. The main purpose of a stock split is to reduce the price of an expensive stock — especially when compared with price levels of peers in the industry — making it accessible to more investors. If a stock costs less, it might be easier for an investor to incorporate it into their portfolio, especially if the shares were rather expensive before a share split. Since stock splits don’t add market value, much of it comes down to making the stock more attainable to everyday investors, and how this impacts behavior by influencing the psychology of investors. If you’re already a shareholder in a company when it declares a stock split, not much changes.
Any gains will likely be temporary if the underlying business fundamentals don’t support the optimism generated. Another disadvantage is a potential increase in the stock’s volatility. Lower-priced shares resulting from a split may attract more speculative trading, potentially leading to greater price shifts. This increased volatility is often undesirable for all companies or investors.
What are reverse stock splits?
A stock split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to smaller investors and provide greater marketability and liquidity in the market. This can increase liquidity (the ability to trade the stock easily) and trading volume. However, a stock split doesn’t change the company’s value—it simply redistributes ownership into smaller, more affordable units. However, stock splits are still used by companies to make their shares appear more attainable to retail investors.
Many companies (specifically their boards of directors) have split their stock periodically throughout their history in order to maintain a desirable share price. It’s important to note that derivative investments such as options will, in turn, become more affordable as well after a stock split. A stock split ratio tells you the number of new shares that will be created after a forward stock split, or by how much the share count will be divided in a reverse stock split. For example, a 3-for-1 stock split means that two shares will be created for every one currently in existence, for a total of three after the split. In addition, in an era of fractional share investing, when investors can buy partial shares, the practical benefits of stock splits for increasing accessibility have been reduced. A reverse/forward stock split is a special stock split strategy to eliminate all about the mortgage interest deduction shareholders holding less than a certain number of shares.
Berkshire Hathaway’s Class A shares (BRK.A) have never been split and traded at over $675,000 per share in September 2024. Yes, shares of any company can undergo a split, as long as the company’s board of directors approves such a move. The dividends paid by shares adjust proportionately following a stock split. In other words, you should receive the same amount of dividends after the split as you did before it. This could in turn fuel greater demand for the company’s shares, causing their value to rise and increasing the value of your portfolio.
Moreover, the stock may become more accessible to additional investors at a relatively lower price. For example, suppose you own 100 shares of a company trading at $200 per share, for a total value of $20,000. All else equal, if the stock split 2-1, you would then own 200 shares of the company at $100 per share after the split for the same total value of $20,000.