What is a stock split?
Companies typically engage in a stock split so that investors can more easily buy and sell shares, otherwise known as increasing the company's liquidity. Stock splits divide a company's shares into more shares, which in turn lowers a share's price and increases the number of shares available. For existing shareholders of that company's stock, this means that they'll receive additional shares for every one share that they already hold.
"If your current stock is valued at $100 per share and there is a 2-for-1 split, you will have two shares worth $50 each," explains Brian Stivers, investment advisor and founder of Stivers Financial Services.
Using Amazon's 20-for-1 stock split as an example, existing shareholders will get 20 shares for each share they currently own. When a company divides each existing share into 20 new shares, that also means that each share is now worth one twentieth of the original value. The market value of the company, however, does not change.
In short, Amazon stock is going to become a lot more affordable to the everyday investor who wants in.
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What to watch out for with a stock split
Though the net value of an existing shareholder's stock doesn't change with a stock split, the new level of demand that can come as more investors purchase the more affordable shares can be beneficial to current investors.
The share price would likely increase again as more investors purchase shares, Stivers says, adding that in the long run, current shareholders could see some potential value increases, though perhaps temporary.
For current Amazon shareholders, the 20-for-1 stock split also frees up some shares to be sold.
"With 20 times the share, it would allow you as an investor to diversify further, if you want to liquidate some of the Amazon shares to diversify further into other holdings," Stivers suggests."This would especially be true if the new split stock increases rapidly in value."
Should you take advantage of a stock split?
It's tempting to want to buy into a pricey stock when it becomes much cheaper to do so; however, eager investors should make sure that stock aligns with their overall investing goals. You shouldn't jump all in just to say you own Amazon stock, for example, unless it's something that has long been a part of your portfolio objectives.
"If the average investor was attracted to Amazon before the split, then it is probably a good time to invest after the split, as it is more obtainable," Stivers says. "However, you should only do so if it is part of a well-diversified portfolio."
A diversified portfolio means that your money is spread out amongst different asset classes (stocks, bonds, real estate, etc.) that react differently to various economic and financial environments. This minimizes volatility while maximizing return opportunity. Robo-advisors can build a diversified portfolio of index funds for you based on factors like your age, risk tolerance and time horizon.
Another way to get in on pricey, big-name stock
You don't have to wait for a stock split to happen to be able to afford investing in the more expensive, popular stock of the day. Some brokers such as SoFi Invest®, Robinhood and Webull allow users to buy fractional shares, or a fraction of a share, so you aren't forced to buy a whole share.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Stock splits divide a company's shares into more shares, which in turn lowers a share's price and increases the number of shares available. For existing shareholders of that company's stock, this means that they'll receive additional shares for every one share that they already hold.
What happens to your investment 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 stock split in simple words? ›
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.
Is a stock split good or bad for investors? ›
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.
How does a stock split affect the stock market? ›
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? ›
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 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.
The main benefits of a stock split include making shares more affordable and increasing their number, thereby enhancing trade volume and liquidity. This accessibility attracts new investors, potentially driving up the stock price, may also appeal to larger investors due to the higher market value post-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.
What are the effects of a stock split accounted for as a 100% stock dividend? ›
If the event is a stock split, there is no change in either Retained Earnings or Common Stock, only a decrease in par value and an increase in the number of issued and outstanding shares.
While a split, in theory, should have no effect on a stock's price, it often results in renewed investor interest, which can have a positive effect on the stock price. While this effect may wane over time, stock splits by blue-chip companies are a bullish signal for investors.
What is the primary purpose of 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.
Are stock splits bullish or bearish? ›
A stock split won't change a company's fundamentals, but it makes shares more affordable for smaller investors. Stock splits are generally bullish—at least in the short term—but the exact reason remains something of a mystery.
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.
How to profit from a reverse stock split? ›
If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).
Do stock splits decrease equity? ›
When the company issues a stock split, the par value of the common stock also changes. However, overall equity for the company will remain unchanged.
Does a stock split increase assets? ›
Stock splits do not impact the overall value of your assets. For an investor, the assets in your portfolio may undergo changes over time.
