Exchange-traded funds let an investor buy lots of stocks and bonds at once. To be clear, a stock split doesn’t have any effect on the overall value of your investment, at least in theory. In the real world, the circumstances surrounding the split can certainly move a stock higher or lower. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month how to start white label forex brokerage step by step guide through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.
Stock splits divide a company’s shares into more shares, which can make the stock more accessible.
- This decision is made by management based on their subjective views of the historical trading range of the stock and other factors.
- Nevertheless, it’s important to grasp how stock splits work, especially for understanding how the market may react post-split.
- Although stock splits are generally bullish—at least in the short term—the company’s fundamental performance over time is what will determine the future value of each share.
So, if you owned 30 shares of a company’s stock before such a reverse split went into effect, you’d own 10 shares afterward. It’s important to know that a reverse stock split generally (but not always) happens for a negative reason such as after a big decline in a stock’s price. The same is also true of options, which give holders the right to buy or sell a stock at a pre-determined price within a certain period of time. Along with this increase in share count, the price per share is adjusted downward in line with the split ratio. Thus, if a company carries out a two-for-one split, a share priced at $100 before the split would be priced at $50 afterward. In fact, in some cases, the proportion of the split is even higher, such as 20-for-1.
There are several ways that a stock split can impact you as an individual shareholder. In a nutshell, only official shareholders of record on the payable date participate in the stock split. 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.
Is a Stock Split Good for Investors?
While the number of shares owned changes after a stock split, the split itself does not change your investment value. Apple’s outstanding shares increased from 861 million to 6 billion shares. However, the market capitalization of the company remained largely unchanged at $556 billion. The day after the stock split, the price had increased to a high of $95.05 to reflect the increased demand from the lower stock price. A stock split is when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company’s market value. It’s akin to cutting a cake into smaller slices; you end up cryptocurrency exchange for bitcoin, ethereum and altcoins with more pieces, but the total amount stays the same.
Stock splits explained
This opens the stock to an entirely new subset of the investing public (namely, those who previously couldn’t afford even a single share), which can cause a spike in demand that pushes the stock higher. If your broker allows you to trade fractional shares, this isn’t a concern, but, for many investors, high-dollar stocks are inaccessible. Stock splits also can convey management’s confidence in a stock price, which can trickle down to investors. A stock split is when a company decides to exchange its stock for more (and sometimes fewer) shares of its own stock, with the price per share adjusting so that there is no change in the overall value of the company. Many stock splits are greeted by investors as good news, and shares sometimes rise as a result. However, some splits are seen negatively and may push the stock lower.
Higher-priced stocks such as Apple may offer a higher exchange ratio, such as the company did in 2020 with its 4-for-1 split or its 7-for-1 split in 2014. Imagine you own 500 shares of a company that’s undertaking a 1-for-5 reverse split and is trading at $3 per share before the split. Following the split you would own 100 shares but the price would be adjusted to $15 per share. Similarly, you own the same $1,500 in dollar value that you had before the stock split.
Say XYZ Bank was selling for $50 a share a couple of years ago but has risen to $100 per share. Of course, this does not mean a stock will rise after a stock split announcement or when it goes into effect. Remember, a stock split in and of itself does not impact your holdings’ value.
In other words, stocks that are rising a lot tend to have forward splits, and they’re rising a lot because they’re growing their profits and pushing the price higher. Conversely, stocks that have fallen tend to use a reverse split to move their price back into a “respectable range,” and they’ve also likely suffered a period of subpar performance or declining profitability. Such an event can prove positive for a company’s image, generating favorable visibility and therefore drawing investors to the organization. Another way a share split can impact you as an investor is by making individual common shares more affordable. Following one of these events, you may be able to purchase shares of a stock that were previously unaffordable because their price was too high.
For instance, in a two-for-one split, an investor who owned one share priced at $100 would end up with two shares, each worth $50 but with the same total value. A stock split is when a company issues more shares of stock to its existing shareholders without diluting the value of their holdings. Assuming no other movement in the stock price, you have $10,000 in stock both before and after the split. 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 bond yields vs equity yields lower price. For those investors, a stock split can provide a powerful motivator to get off the sidelines.
