What Happens After a Stock Split (2024)

The mere mention of a stock split can get an investor's blood rushing. But are they worth all the excitement? It depends on why they happen and what it means to the investor.

Say you have a $100 bill and someone offers you two $50 bills in exchange . Most people won't get excited over a proposition like this because you still end up with the same amount of money. Stock splits present similar situations for people in the investment industry.

Key Takeaways

  • 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.
  • The most common splits are two-for-one or three-for-one. A stockholder gets two or three shares respectively for every share held.
  • A company divides the number of shares that stockholders own in a reverse stock split, raising the market price accordingly.

What Is a Stock Split?

A stock split is a corporate action by a company's board of directors that increases the number of outstanding shares. It's accomplished by dividing each share into multiple shares, diminishing its stock price.

A stock split does nothing to the company's market capitalization. This figure remains the same. Each stockholder receives an additional share for each share held in a two-for-one stock split but the value of each share is reduced by half. Two shares now equal the original value of one share before the split.

Let's say Stock A trades at $40 and has 10 million shares issued. This gives it a market capitalization of $400 million or $40 x 10 million shares. The company then implements a two-for-one stock split. Shareholders receive another share for each share they currently own.

Now they have two shares for each one previously held but the stock price is cut by 50% from $40 to $20. The market cap stays the same, doubling the number of shares outstanding to 20 million and simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million.

The true value of the company hasn't changed at all.

Common Stock Splits

Stock splits can take many forms but the most common are two-for-one, three-for-two, and three-for-one. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. Using the example above, divide $40 by two to get the new trading price of $20. Do the same for a three-for-two split: 40/(3/2) = 40/1.5 = $26.67.

Reverse stock splits are usually implemented because a company's share price loses significant value.

Companies can also implement a reverse stock split. A one-for-10 split gives you one share for every 10 shares you own.

This is the effect a split would have on the number of shares, share price, and the market cap of the company doing the split:

Reasons for Stock Splits

Companies consider carrying out a stock split for several reasons. The first is psychology. Some investors may feel that the price is too high for them to buy as the price of a stock gets higher and higher but small investors might feel that it's unaffordable. 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.

Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before. They have more stock to trade if the price rises.

Another reason companies consider stock splits is to increase a stock's liquidity. With a lower price, more shareholders can afford to invest in high-value companies, ultimately increasing the market for that company's stock. Stocks that trade above hundreds of dollars per share can result in large bid/ask spreads.

None of these reasons or potential effects agree with financial theory, however. Splits are irrelevant yet companies still do them. Splits are a good demonstration of how corporate actions and investor behavior don't always fall in line with financial theory. This has opened up a wide area of financial study called behavioral finance.

Advantages for Investors

There are plenty of arguments over whether stock splits help or hurt investors. 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.

Investment newsletters nonetheless take note of the often positive sentiment surrounding a stock split. Entire publications are devoted to tracking stocks that split and attempting to profit from the bullish nature of the splits. Critics would say this strategy is by no means a time-tested one and is questionably successful at best.

Factoring in Commissions

Buying before a split was historically a good strategy due tocommissionsweighted by the number of shares you bought. It was advantageous only because it saved you money on commissions. This isn't such an advantage anymore because most brokers offer a flat fee for commissions. They charge the same amount whether you trade 10 or 1,000 shares.

What Are Outstanding Shares?

Outstanding shares are those that are currently owned by someone or something other than the company itself. They're held by the public, either through individual ownership or as components of a pension fund or mutual fund. Individual owners can be officers or employees of the company.

The company can no longer issue or sell these shares because they're held by someone or something else.

Why Would a Company Do a Reverse Stock Split?

Companies typically do reverse stock splits to attract new investors. They tend to occur because companies believe their stock price is too low. Dividing the number of shares that stockholders own will proportionately raise the market price. Companies that perform this tactic are often smaller entities that trade in over-the-counter markets rather than on the major U.S. stock exchanges.

What Is a Class A Share?

Some companies issue shares of common stock divided into two or more classes, although approximately 90% issue only one class. The classes award different voting rights. Class A shares can award 10 votes per share compared to Class B shares which have only one vote per share.

The Bottom Line

A stock split increases the number of shares a company has, but it doesn't automatically make anyone any richer. There are some psychological reasons why companies split their stock but the business fundamentals remain the same. However, the psychological value of a stock split can increase interest in the company's equity.

What Happens After a Stock Split (2024)


What Happens After a Stock Split? ›

The fraction of the company that each share represents is reduced, but each stockholder is given enough shares so that his or her total fraction of the company owned remains the same. On the day of the split, the value of the stock is also adjusted so that the total capitalization of the company remains the same.

What happens after a stock 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.

What do stocks typically do after a split? ›

Normally, a stock split will reduce the price per share of each share in proportion to the increase in shares. Using this example, a 2-1 split for a stock trading at $200 would halve the price to $100 and double the number of total shares outstanding.

What happens after a stock split quizlet? ›

When a stock splits, the share price goes down and the number of shares goes up. If a company splits 2-for-1, 500 shares at $20 becomes what? If a stock is split 2-1, it makes shares more affordable.

What happens if you don't have enough stock for a stock split? ›

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.

Should I sell after 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.

Should you buy after a stock split? ›

Splits are generally a positive announcement, with the lower share price helping boost share liquidity. And while both Celsius CELH and Novo Nordisk NVO shares have delivered market-beating returns post-split, strictly buying post-split is not a feasible strategy.

Is it better to sell stock before or after split? ›

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.

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 two things happen when a stock splits two for one? ›

Let's look at a common scenario, which is a 2-for-1 split: Investors receive one additional share for each share they already own. The stock price is halved—$50 becomes $25, for example—and the number of shares outstanding doubles.

How long does it take after stock split? ›

As with other corporate actions like bonus share issues, stock splits are also automatically credited to your demat account within 4-5 days from the record date issued by the company. You can check your demat holding statement to ensure that the split shares are credited appropriately.

How do you calculate stock after 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.

Is a reverse split bad? ›

Are reverse stock splits good or bad? All things equal, a reverse stock split is neither good nor bad and has no impact on the value of the total company.

Should you sell before a reverse split? ›

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.

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

Does it matter to buy before or after a stock split? If you buy a stock before it splits, you'll pay more per share than what it'll cost after it splits. If you're looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.

Should we buy before or after stock split? ›

Buying before a split might mean purchasing at a higher per-share price, but you'll own more shares after the split. Buying after a split could be more affordable, with the potential for the stock to appreciate.

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.

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