What Are Stock Splits, and Why Do Stocks Split?

Splitting the stock brings the share price down to a more attractive level. While the actual value of the stock doesn’t change one bit, the lower stock price may affect the way the stock is perceived, enticing new investors. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before, and of course, if the price rises, they have more stock to trade. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split. This is because small investors may perceive the stock as more affordable and buy the stock. A reverse split reduces a company’s outstanding shares increasing per-share value.

  • It is typically done to avoid being delisted from an exchange if the stock is nearing the minimum share price allowed on that exchange.
  • So when the share price has risen substantially, many public companies end up declaring a stock split to reduce it.
  • The likeliest reason Palo Alto Networks would find its shares under pressure is its valuation.
  • A stock split is a way for companies to change the per-share price without changing market capitalization.
  • If you had 100 shares of a company that has decided to split its stock, you’d end up with 200 shares after the split.

In this article, we explore stock splits, why they’re done, and what it means to the investor. If the company undergoing a stock split has a dividend, the dividends per share (DPS) issued to shareholders will be adjusted in proportion to the split. After a stock split, the number of shares in circulation increases, and the share price of each individual share declines. 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.

In the end, whether you have two $50 bills or single $100, you have the same amount in the bank. None of these reasons or potential effects agree with financial theory. A finance professor will likely tell you that splits are totally irrelevant—yet companies still do it. Splits are a good demonstration of how corporate actions and investor behavior do not always fall in line with financial theory.

Stock Split Calculation Example

While stock splits may not be as common as stock buybacks, they can make a material difference to investors. These dividends are not taxable or qualify to be in the dogs of the Dow process. The shareholder of record date is the date you must own the stock to be eligible to receive the additional shares or dividend. The effective date or distribution date as a dividend is the date when the additional shares are placed in your brokerage account after the market close or the following morning.

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. There are numerous reasons why a company might choose to split its stock, but some apply far more commonly than others. Perhaps, the most frequent genesis of a stock split is to provide investors with added liquidity by lowering a company’s share price. Here, Starbuck’s April 2015 stock split — its sixth as a publicly traded company — serves as a useful example.

It’s basically a draw, and the value of your investment won’t change. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Neither Schwab nor the products and services it offers may be registered in your jurisdiction. Neither Schwab nor the products and services it offers may be registered in any other jurisdiction. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.

Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit. However, the one detail that does, in fact, change is that more pieces can be distributed to people who may not have a slice. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Companies often like the idea of creating more liquidity by making a price more attractive and attainable for a larger number of people. “You might not be able to buy Apple at $500, but you could buy it at $125,” she says.

When a stock splits, its liquidity and trading volume often improves. Most companies that split their stock see an increase in the long-term growth of their share price as more investors buy up the now-cheaper stock. This, in turn, often benefits existing shareholders as they see the value of their investment increase.

step trading guide

Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Say you had a $100 bill and someone offered you two $50 bills for it. This might sound like a pointless question because most people don’t get excited over a proposition like this. Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics.

Disadvantages of stock splits

Consequently, there is a window between the announcement and the stock split. You would not want to base your decision to buy (or sell) a stock based solely on a stock split. A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company.

What is a forward stock split?

More often than not, a reverse split involves a company that trades in the over-the-counter markets (OTC). Reverse stock splits are less common among seasoned companies that trade on one of the major U.S. stock exchanges. While the number of shares owned changes after a stock split, the split itself does not change your investment value. An investor who owned 1,000 shares of the stock pre-split would have owned 4,000 shares post-split. Apple’s outstanding shares increased from 3.4 billion to approximately 13.6 billion, while the market capitalization remained largely unchanged at $2 trillion.

Immediately after the split is implemented, the number of shares outstanding would double to 20 million. By contrast, the share price would be halved to $25, leaving the market cap unchanged at $500 million (20 million times 25). 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 company with 20 million shares announces a 2-for-1 stock split, shareholders receive one additional share of stock for each share they already own. For example, when a company decides to split its shares in order to make shares more affordable, how to calculate your business valuation 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.

The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. Generally speaking, a traditional stock split is considered a good thing. While you may have paper stock certificates for the original shares you purchased, don’t necessarily wait for new ones to appear in the mail following a stock split. More companies are now issuing new shares in book-entry form (i.e. electronically) rather than the old-fashioned way. Let’s assume that you currently own 100 shares in a company with a share price of $100. More specifically, an abnormally high share price can prevent retail investors from diversifying their portfolios.

If you already own shares in the company going through the split, you don’t have to do anything except wait for the split to occur and the number of shares in your brokerage account to adjust. One is that stock splits don’t really change anything about the business, and they can come at a regulatory cost. The company has to pay for all of the legally-required filings and the paperwork involved with adjusting the number of shares that exist. Investors typically conflate high share prices with a successful company. That leads to the perception that a company is doing so well that it has to split its stock to remain affordable and that it must be a good investment opportunity.

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. In fact, CEO Howard Schultz specifically cited added liquidity as a rationale for the move in the press release announcing the move. “This split is a direct reflection of the past seven years of increasing shareholder value, enhancing the liquidity of our shares, and building an attractive share price,” he said.

New share price is calculated by multiplying the original share price by the stock split ratio. When investing, keeping track of a company’s fundamentals and things like stock splits can be difficult. Its artificial intelligence can design a portfolio for any goal or economic condition. As a result, when looking at a historical chart, one might expect to see the stock dropping from $50 to $25.

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