What Is A Stock Split? Why Do Companies Split Their Stock? (2024)

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When a company is concerned that its share price is too high or too low, it can opt for a stock split or a reverse stock split. A stock split can help a company lower its share price to appeal to new investors, while a reverse stock split can boost its share price and help preserve its listing on a major stock exchange.

What Is a Stock Split?

A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder’s stake remains the same.

Say you have one share of a company’s stock. If the company opts for a 2-for-1 stock split, the company would grant you an additional share, but each share would be valued at half the amount of the original. After the split, your two shares would be worth the same as the one share you started with.

What Is a Reverse Stock Split?

A reverse stock split reduces a company’s number of shares outstanding. If you owned 10 shares of stock in a company, for example, and the board announced a 1-for-2 reverse stock split, you’d end up with five shares of stock. The total value of your shares would remain consistent. If the 10 shares were valued at $4 per share before the reverse split, the five shares would be valued at $8 per share after the reverse split. In either case, the total value of your investment remains $40.

Why Do Companies Split their Stock?

In many cases, a stock split is a strategy used by companies to meet a specific goal, says Amanda Holden, a former investment counselor and the founder of Invested Development, a course aimed at helping women learn about investing.

Companies often like the idea of creating more liquidity by making a price more attractive and attainable for a larger number of people. “You might not be able to buy Apple at $500, but you could buy it at $125,” she says.

On the other hand, a reverse stock split is often aimed at helping a company meet the minimum requirements to remain listed on an exchange.

“You can get kicked off an exchange if your price drops too far,” Holden says. “A reverse stock split consolidates your shares in a way that results in a higher per-share price that can keep you trading on a public and accessible exchange.”

This helps ensure more people can access the shares and keeps existing shares liquid. While a reverse stock split is often thought of as a red flag for investors, in the long run, it can help a company survive and recover from a rough patch.

What Is a 2 for 1 Stock Split?

A 2-for-1 stock split grants you two shares for every one share of a company you own. If you had 100 shares of a company that has decided to split its stock, you’d end up with 200 shares after the split.

A 2 for 1 stock split doubles the number of shares you own instantly. Two-for-one and 3-for-1 stock splits are relatively common, says Holden. While Apple (AAPL) and Tesla (TSLA) have gotten a lot of publicity for their 2020 stock splits, their 5-for-1 or 4-for-1 stock splits were uncommon choices.

How Does a Stock Split Affect You?

Because a stock split doesn’t change the underlying value of your investment, you may not notice any more substantial changes than the number of shares in your investment account.

“There’s no particular advantage for those who already have shares,” Holden says. “Nothing about ownership is going to change. You might have twice as many shares, but they are at half the price, so it balances out.”

For those who aren’t already shareholders, though, a stock split can provide motivation to buy. For example, if you couldn’t afford a share of Tesla before its recent stock split, you might be able to get one now.

The ability for more people to buy a stock can bump up its price, which in turn may actually increase a company’s value, at least temporarily, Holden says.

“With more people able to buy, you see more demand, and the price can go up. If you have more shares, this can be beneficial to you if you hold on,” Holden says. “However, that stock and total value bump is generally temporary. To see long-term gains, you usually need to keep holding that stock to get the benefit over time.”

Are Stock Splits Important with Widespread Fractional Share Investing?

As fractional investing becomes more popular and widespread, some experts speculate that stock splits will become less important as fractional shares allow you to buy into a company at virtually any price point.

Currently, investing apps like Robinhood, Stash, M1 Finance and SoFi Invest, as well as legacy brokerages like Charles Schwab and Fidelity, allow clients to buy fractional shares of certain stocks and exchange-traded funds (ETFs).

“It’s hard to say how fractional investing will impact investing and stock splits since there isn’t a lot of data right now,” Holden says. “But I think it will take significant time before fractional investing eliminates the need for stock splits.”

And that’s not even considering the psychological aspect of stock splits. “Humans love a round number,” says Holden. “There’s something about knowing you have the money to buy a full share that motivates many investors.”

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The Bottom Line

In the end, a stock split—or even a reverse stock split—doesn’t have a huge practical impact on a company’s current investors. A stock split’s biggest impact is on investors who might be watching a particular stock and hoping to purchase a full share for a lower price. For those investors, a stock split can provide a powerful motivator to get off the sidelines.

What Is A Stock Split? Why Do Companies Split Their Stock? (2024)


What Is A Stock Split? Why Do Companies Split Their Stock? ›

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.

What is a stock split and why do companies do it? ›

A stock split is when a company divides and increases the number of shares available to buy and sell on an exchange. 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.

What is a stock split quizlet? ›

Traditional stock split. A split where the value of a share and the number of shares are changed in such a proportional way that the value decreases as the number of shares increases, while the market cap remains the same.

What is the primary reason for a stock split? ›

By splitting the stock, the company essentially lowers the price per share, making it more affordable and attractive to potential investors. The number of outstanding shares will rise due to a stock split, while the par value and market price will drop.

What is an example of a stock split? ›

The investor receives 2 additional shares for each existing share, resulting in a total of 10x 2 shares = 20 shares. The share price is adjusted to reflect the split ratio, becoming Rs. 1,400 / 2 = Rs. 700 per share.

Why does a company split its stock quizlet? ›

Why does a company split its stock? The stock is trading at a high price, and the company wants to bring the price in line with a theoretical ideal range. The market value must be higher than the book value.

Why do companies sometimes split their stock on Quizlet? ›

Why do companies sometimes split their stocks? When a stock splits, stockholders receive two (or more) shares of stock for each share they own. Each is worth half (or less) of the original share, so while the number of shares increases, the total value of stockholders' holdings stays the same.

How do you explain stock splits? ›

A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders. Stock splits can improve trading liquidity and make the stock seem more affordable.

What is stock split in detail? ›

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.

Which of the following is true about a stock split? ›

The answer is d. The stockholder's percentage ownership remains unchanged. A stock split refers to the situation where the number of stocks or shares are split into more shares. For example, the outstanding shares maybe 400 million.

Is a stock split good or bad why? ›

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.

Why would a company not want to do a stock split? ›

10 Unless the stock is facing liquidity issues, there may not be any compelling reason for a company to split its stock. Some companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige.

Which stock is splitting in 2024? ›

2024 Stock Splits
DateSymbolCompany Name
Apr 16, 2024LOARLoar Holdings Inc
Apr 15, 2024WISAWisa Technologies Inc
Apr 15, 2024MRINMarin Software Inc
Apr 15, 2024GRRRGorilla Technology Group Inc
87 more rows

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 are the pros and cons of a stock split? ›

Pros and cons of stock splits
  • Pro: Makes shares more affordable. ...
  • Pro: May trigger renewed investor interest. ...
  • Con: Could trigger volatility. ...
  • Con: Does not add any new value: At least in the short term, the total value of your assets for the stock in question remains the same.
Dec 27, 2022

What is 100 shares of stock called? ›

In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.

Who benefits from a stock 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 provides greater marketability and liquidity in the market.

Is a stock split good or bad for a company? ›

Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices.

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