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.
Two examples: Both Amazon and Google parent company Alphabet announced 20-for-1 stock splits, meaning investors received 20 shares of the stock for every one share they owned.
While neither the company’s value nor that of your investment changes in a split, it’s important to understand how stock splits can impact your portfolio. Here’s what you need to know.
Stock splits are accompanied by somewhat confusing arithmetic, such as “2-for-1” or “3-for-2.” As with many things in life, pizza can help.
Imagine a company’s value represented by an entire pizza. When its stock began trading, that pizza was sliced into a finite number of pieces, or shares, that were offered to investors. For simplicity’s sake, let's say the pizza was divided into eight slices and you owned one share (or slice).
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. Whereas you owned one-eighth of the company before, as a result of the split you’ll now own two-sixteenths. Same amount of pizza, just a different number of slices.
That same principle is applied no matter what the split ratio is. (Have an appetite to learn more? Check out some other stock market basics.)
There is also such a thing as a “reverse” stock split — as the name suggests, this kind of split goes the opposite way: The number of shares is reduced, but the price per share increases. This is often done to meet the minimum stock price required for a company to be listed on an exchange.
A stock split doesn't make investors rich. In fact, the company’s market capitalization, equal to shares outstanding multiplied by the price per share, isn’t affected by a stock split. If the number of shares increases, the share price will decrease by a proportional amount.
If a stock traded at $100 previously, it will trade at $50 after a 2-for-1 split. Yes, you own more shares, but they’re each worth less. It’s basically a draw, and the value of your investment won’t change.
However, investors generally react positively to stock splits, partly because these announcements signal that a company’s board wants to attract investors by making the price more affordable and increasing the number of shares available. As a result, your portfolio could see a handsome benefit if the stock continues to appreciate. Studies show that stocks that have split have gone on to outpace the broader market in the year following the split and subsequent few years.
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You need to be a shareholder by a certain date, specified by the company, to qualify for a split.
If you're not yet an investor in a company, and a stock split has made its share price more affordable, you'll want to research the stock to ensure it's a good investment for your portfolio before you buy. If it is, you can follow our guide to learn how to buy stocks.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionally, while the market capitalization and the value of the company do not change.
There is some evidence that companies who split their stock outperform the broad market over the near term. Of course, this does not mean a stock will rise after a stock split announcement or when it goes into effect. Remember, a stock split in and of itself does not impact your holdings' value.
The split increases the number of shares outstanding, but the company's overall value does not change. Immediately following the split the share price will proportionately adjust downward to reflect the company's market capitalization.
In a stock split, the corporation issues additional shares to current shareholders, but your total basis doesn't change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.
It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.
The short answer is it doesn't matter, and here's why. As mentioned earlier, a stock split doesn't change the value of the company or the value of an investor's holding. If you buy one share today or 10 shares after the split, you'll be investing the same amount of cash.
That said, many stocks have shown strong performance after a split. In other words, selling your shares of a stock prior to a split isn't always the best decision – unless, of course, you're not well-positioned to continue holding the stock.
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.
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A stock price might sink so low that a company's reputation can be put at risk. Other times, a price that dips below a certain threshold can cause the stock to be delisted from an exchange or dropped from some mutual-fund holdings. Reverse splits are sometimes seen as a sign of company turmoil.
In the event of a stock split, the number of shares increases and the face value of each share reduces, thus making it easier for new investors to show interest and invest in the company's stock.
Stock splits are usually done to make the shares more affordable for investors and increase liquidity. Stock splits do not affect the total value of a shareholder's investment, as the total number of shares owned and the company's market capitalization remain the same.
Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.
Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.
How Does a Stock Split Affect You? Because a stock split doesn't change the underlying value of your investment, you may not notice any more substantial changes than the number of shares in your investment account. “There's no particular advantage for those who already have shares,” Holden says.
Unlike issuing new shares, a stock split does not dilute the ownership interests of existing shareholders. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two-for-one stock split, you will own 200 shares at $50 per share immediately after the split.
Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices. Nor does a split change the total value of an investor's portfolio holding per se.
A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.
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