Stock Splits (2024)

There are many ways you can slice a pie and reasons why you might want to serve larger or smaller pieces, but if you go too big, the size of a piece can become overwhelming. Sometimes, the same could be said of stocks.

When a stock price gets high, sometimes a public company will want to lower that price and can do that with a stock split.

A stock split is a decision by a company’s board to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion. Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits.

For example, let’s say you owned 10 shares of a stock trading at $100. In a 2-for-1 split, the company would give you two shares with a market-adjusted worth of $50 for every one share you own, leaving you with 20 shares. Or, in a 3-for-2 split, the company would give you three shares with a market-adjusted worth of about $66.67 in exchange for two existing $100 shares, leaving you with 15 shares.

While you now have more shares than you started with, the total value of those shares is the same as it was before the split: $1,000. And while the company’s shares outstanding increase with the split, its market capitalization—the total value of the company derived from multiplying the number of shares by the stock price—remains the same, too.

One reason companies split their shares is that a psychological barrier might occur with trading high-priced shares. A very high stock price can intimidate investors who fear there is little room for growth, or what is known as price appreciation. Meanwhile, a company with a very low-stock price might engage in the opposite behavior: a reverse stock split, to increase its per-share price.

Reverse Splits

A reverse stock split tends to occur with small companies that believe their stock price is too low to attract investors. Companies also might do reverse splits to maintain their listing on a stock market that has a minimum per-share price or to appeal to certain institutional investors who might not buy stock priced below a certain amount.

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.

If a reverse split is announced and actually occurs, proceed with caution. Reverse splits tend to go hand in hand with low-priced, high-risk stocks. This is especially true with reverse splits that result in a post-split share price that is many times the price of the stock's current price.

Here's how a reverse split works: Say a company announces a 200:1 reverse split. Once approved, investors will receive one share for every 200 shares they own. So, if you owned 5,000 shares of stock at a price of 10 cents per share worth a total of $500 before the reverse split, you would own 25 shares at a price of $20 each after the reverse split, maintaining that total value of $500. The amount of money you have invested doesn't change, just the number of shares you own.

The Role of Regulators

As the Securities and Exchange Commission (SEC) explains, "state corporate law and a company's articles of incorporation and by-laws generally govern the company's ability to declare a reverse stock split and whether shareholder approval is required."

If a company is required to file reports with the SEC, it may notify its shareholders of a reverse stock split in a number of ways, including on Forms 8-K,10-Qor10-K. Use the SEC's EDGARsearch tools to view these reports.

FINRA does not approve reverse splits, but it does process reverse stock splits as part of its functions related to company corporate actions in the OTC market. OTC companies must submit notice to FINRA 10 days prior to the record/effective date of the corporate action. Once a corporate action submission is successfully processed (which may take longer than 10 days), it will be posted to the OTC Daily List, where investors can learn about reverse stock splits and other company corporate actions, such as a merger or acquisition, payment of dividends or a company dissolution or liquidation.

Remember that a stock split—or a reverse stock split—does nothing to change the value of a company. How a stock performs in the long run will depend on multiple factors, not on how its shares are split.

Stock Splits (2024)

FAQs

How do you solve stock splits? ›

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.

When you own 100 shares of a $100 stock that splits two for one you will now own? ›

Let's assume that you currently own 100 shares in a company with a share price of $100. If the company declares a two-for-one stock split, you would now own 200 shares at $50 per share post-split.

Is it good for you when a stock splits? ›

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 provides greater marketability and liquidity in the market.

Do stocks usually go up after a split? ›

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 work for dummies? ›

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 stocks are expected to split in 2024? ›

3 Potential Stock Splits to Add to Your 2024 Radar
  • Broadcom (NASDAQ:AVGO) is the most expensive stock on this list on a per-share basis. ...
  • Deckers Outdoor (NYSE:DECK) is another that needs a stock split. ...
  • Nvidia (NASDAQ:NVDA) is no stranger to the spotlight after gaining almost 2,000% over the past five years.
Mar 20, 2024

Is it better to buy stock before or after a split? ›

Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth. But investors shouldn't buy a stock simply because they hope it'll rise in price after a split.

What are the disadvantages of a stock split? ›

Disadvantages of a Stock Split

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.

Is a 100% stock dividend the same as a stock split? ›

Short Answer. Stock dividend means distribution of additional shares of own stock to stockholder without any payment in return. Stock split is the distribution of additional shares more than one new share in exchange for each one existing share.

Are stock splits risky? ›

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.

Who benefits from a stock split? ›

It increases liquidity

Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter.

How often do stocks go up after a 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.

Why is a share of Berkshire Hathaway over $300,000? ›

How did the Berkshire Hathaway Class A shares become so expensive? It was a deliberate strategy by Warren Buffett to keep the number of shareholders low. When most companies increase in value, the corporation will “split” shares - give you two shares for each one you have, cutting the price in half.

What happens to your money when a stock splits? ›

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.

Why do stocks go down after a split? ›

Price Decrease, Increased Liquidity: After a stock split, the price per share typically decreases proportionally to the split ratio (e.g., a 2-for-1 split would halve the price per share). This can make the stock more affordable for retail investors and increase liquidity as more investors can afford to buy the stock.

Is it better to buy before or after a stock split? ›

If a company was a bad investment before a stock split, it would still be a bad investment. If it were a good investment before the split, it would still be a good investment, and now may be more affordable to some investors due to the reduced share price.

What does a 20 to 1 stock split mean? ›

When a company splits its stock, that means it divides each existing share into multiple new shares. In a 20-1 stock split, every share of the company's stock will be split into 20 new shares, each of which would be worth one twentieth of the original share value.

What does a 3 for 2 stock split mean? ›

A 3-for-2 split means the investor will have one and one half times as many shares as the investor had before the split, with each share having a value of two-thirds of the pre-split market price.

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