What is a stock split? (2024)

FAQs

Is a split good for a stock? ›

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.

A stock split doesn't change the fundamentals of a business. A stock split is a relatively simple process of splitting the company's "pie" into more pieces. Investors end up with more shares, but those shares are worth proportionally less.

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.

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.

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.

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.

Dow Jones Industrial Average members Chipotle and Walmart also announced stock splits earlier this year. A stock split does nothing to change the value of an investor's holding. Instead, it simply reduces a company's share price, which is then offset by a matching increase in share count.

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.

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.

The company has many things going for it. Covering all of Nvidia's proven or potential growth catalysts would take a book, but let's scratch the surface: Nvidia is making money hand over fist. Top-line revenue jumped 262% year over year in the first quarter, driving adjusted earnings 461% higher.

How do you know if a stock is going to split? ›

There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see a dramatic rise in their stock value consider splitting stock for strategic purposes.

Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.

It doesn't matter if you own a stock before or after a split because the value won't change. A stock split is purely a mathematical decision that does not reflect the valuation of a company. If a company is going to perform well, it will before or after a split. If it won't, then it won't even after a split.

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 provide greater marketability and liquidity in the market.

While a standard forward stock split is generally considered bullish, a reverse stock split is typically considered bearish.

A stock split is when a company increases its number of outstanding shares. That changes the price per share, but not the overall value of shareholders' holdings. In Chipotle's case, the board has approved a 50-for-1 stock split — meaning each Chipotle share is set to be split into 50 smaller shares.