An offer of more shares to existing shareholders
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
What is a Stock Split?
Publicly-traded companies all have a given number of outstanding sharesof stock in their company that have been purchased by and issued to investors. A stock split is a decision by the company to increase the number of outstanding shares by a specificied multiple.
More About Stock Splits
When a company decides to split its stock, it determines the ratio for the split. There are a variety of combination ratios open to the company. However, the most common are 2-for-1, 3-for-1, and 3-for-2 splits.
To understand the concept better, let’s look at an example:
Company A has decided to split its stock and has settled on the most common split ratio: 2-for-1. In this example, shareholders who’ve already purchased and been issued shares of Company A’s stock would be given another share for every stock they already own. In such a scenario, let’s assume that Company A has 30 million outstanding shares. After the 2-for-1 stock split, they’ll have 60 million. However, this also means that the value of each share decreases by 50%.
Stock splits, as our example shows, increase Company A’s total number of shares outstanding, but make two shares the same value as one share would have been before the split. Company A’s market capitalization isn’t affected by this because the total market value of all outstanding shares hasn’t changed.
Reasons for Stock Splits
Why would a company want to double or triple its outstanding stock shares if its market capitalization won’t be affected?
There are a number of reasons for stock splits. However, there are two that are most common. The first has to do with perceived company liquidity. With each share’s price dropping a certain percentage – depending on the ratio that the company decides to use – investors tend to see the company’s stock as more affordable, and therefore may be more likely to buy shares. The lower the share price, the less risky the stock seems.
A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price.
The move is a useful strategy when a company’s stock price rises to a level that prices many investors out, or when the price has risen significantly higher than its competitors’ stock.
Key Takeaway
Stock splits can be a lucrative and important step for companies looking to draw in more investors. This is particularly true for companies that are experiencing rapid growth. A company that is growing or believes it will grow may choose to split their stock, giving a positive indication of growth to investors, which ultimately helps it grow.
Related Readings
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)â„¢ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
FAQs
Reverse splits also can diminish or force out small investors, who may not have enough shares to be consolidated. For example, if a company decided on a 1-for-50 reverse split, any holders of fewer than 50 shares wouldn't be offered a fractional new share. They would instead be paid cash for their shares.
When you own 100 shares of a $100 stock that splits two for one you will now own? ›
💡Example: You own 100 shares of company A, trading at $100 per share, making the value of your position $10,000 (100 x $100). The company declares a 2-for-1 stock split. As a result, you will now own 200 shares at a price of $50 per share.
Is a 3 to 1 stock split good or bad? ›
One side says a stock split is a good buying indicator, signaling that the company's share price is increasing and doing well. This may be true but a stock split simply has no effect on the fundamental value of the stock and poses no real advantage to investors.
Is it better to buy before or after a stock split? ›
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.
What happens if you have less shares than the reverse split? ›
Post-reverse split, shareholders will own fewer shares but the price per share will be proportionately higher. As a result, the value of an investment will not change. If the reverse split results in a fractional share, the fractional share will automatically be redeemed for cash.
How do you profit from stock splits? ›
A stock split doesn't add any value to a stock. Instead, it takes one share of a stock and splits it into two shares, reducing its value by half. Current shareholders will hold twice the shares at half the value for each, but the total value doesn't change.
Do stocks usually go up after a split? ›
And a stock split doesn't guarantee an ensuing rise in price. Look at Tesla, which fell nearly 12% in the year after it announced a three-for-one stock split on Aug. 5, 2022.
What is the formula for the stock split? ›
Calculating total shares after stock split
Shareholders who wish to estimate the total number of shares that they will own after a stock split can use the following formula: Total number of shares post stock split = number of shares held * number of new shares issued for each existing share.
Do I lose money when a stock splits? ›
Stock splits: What you need to know. A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not. Here are the key things to know about stock splits.
Is Walmart stock splitting in 2024? ›
30, 2024 — Walmart Inc. (NYSE: WMT) announced that it will conduct a split of its outstanding shares of common stock at a ratio of 3:1.
Are Stock Splits Good or Bad? Stock splits are generally done when the stock price of a company has risen so high that it might become an impediment to new investors. Therefore, a split is often the result of growth or the prospects of future growth, and it's a positive signal.
Will stocks go back up in 2024? ›
Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.
Did Costco stock split? ›
Costco's last stock split was in 2000
The last time Costco management enacted a stock split was back in early 2000 when the warehouse club retailer split shares on a 2-for-1 basis.
Do stocks fall after split? ›
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.
What happens if you short a stock and it splits? ›
Stock splits do not affect short sellers in a material way. There are some changes that occur as the result of a split that can impact the short position. However, they don't affect the value of the short position. The biggest change that happens in the portfolio is the number of shares shorted and the price per share.
When stocks split you get less stock than you started with? ›
A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.
What happens if a stock splits and you own partial shares? ›
If the company does a 1/10 stock split, for every 10 shares you own, you will end up with one, but that one share will be worth 10 times as much. In this case, the share price will increase to $5 (from $0.50) and the number of existing shares is divided by 10.
Do investors lose money in a stock split? ›
Stock splits: What you need to know. A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not. Here are the key things to know about stock splits.
