Stock Splits: What They Are, How They Affect Your Portfolio - NerdWallet (2024)

What is a stock split?

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).

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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.

» Need a brokerage account? Check out NerdWallet’s best brokers for stock trading

What happens when a stock splits

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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Stock Splits: What They Are, How They Affect Your Portfolio - NerdWallet (4)

How to take advantage of a stock split

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: What They Are, How They Affect Your Portfolio - NerdWallet (2024)

FAQs

Stock Splits: What They Are, How They Affect Your Portfolio - NerdWallet? ›

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.

What happens to your portfolio when a stock splits? ›

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 is the impact of stock split? ›

In a stock split the number of outstanding shares increases and the price per share decreases proportionately, while the market capitalization and the value of the company do not change.

Are stock splits good or bad? ›

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.

How does a stock split affect stockholders wealth? ›

In a stock split, a company divides its existing stock into multiple shares to boost liquidity. Companies may also do stock splits to make share prices more attractive. For shareholders, the total dollar value of their investment remains the same because the split doesn't add real value.

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

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

Is your portfolio worth more right after a stock split? ›

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.

What are the downsides 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.

Which stock is splitting in 2024? ›

2024 Stock Splits
DateSymbolCompany Name
Apr 24, 2024CDTXCidara Therapeutics Inc
Apr 23, 2024ZAPPZapp Electric Vehicles Group Ltd.
Apr 23, 2024PIRSPieris Pharmaceuticals Inc
Apr 23, 2024MYSZMy Size Inc
87 more rows

Do investors lose money in a stock split? ›

Although the number of shares outstanding increases during a stock split, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.

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.

Do stocks usually go up after a split? ›

A stock split itself doesn't inherently cause the stock price to go up or down. The total value of the company remains the same after a split, as it simply divides existing shares into more shares with a lower price per share. Generally speaking, the price in the market will go up.

Does a stock split hurt shareholders? ›

The split may elicit additional interest in the company's stock, but fundamentally investors are no better or worse off than before, since the market value of their holdings stays the same.

Should I sell before a stock split? ›

Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.

Does the investor lose money after a stock split? ›

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.

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.

Should you sell before a stock split? ›

Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.

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