Stock Splits (2024)

There are many ways you can slice a pie and reasons why you might want to serve larger or smaller pieces, but if you go too big, the size of a piece can become overwhelming. Sometimes, the same could be said of stocks.

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. Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits.

For example, let’s say you owned 10 shares of a stock trading at $100. In a 2-for-1 split, the company would give you two shares with a market-adjusted worth of $50 for every one share you own, leaving you with 20 shares. Or, in a 3-for-2 split, the company would give you three shares with a market-adjusted worth of about $66.67 in exchange for two existing $100 shares, leaving you with 15 shares.

While you now have more shares than you started with, the total value of those shares is the same as it was before the split: $1,000. And while the company’s shares outstanding increase with the split, its market capitalization—the total value of the company derived from multiplying the number of shares by the stock price—remains the same, too.

One reason companies split their shares is that a psychological barrier might occur with trading high-priced shares. A very high stock price can intimidate investors who fear there is little room for growth, or what is known as price appreciation. Meanwhile, a company with a very low-stock price might engage in the opposite behavior: a reverse stock split, to increase its per-share price.

Reverse Splits

A reverse stock split tends to occur with small companies that believe their stock price is too low to attract investors. Companies also might do reverse splits to maintain their listing on a stock market that has a minimum per-share price or to appeal to certain institutional investors who might not buy stock priced below a certain amount.

More often than not, a reverse split involves a company that trades in the over-the-counter markets (OTC). Reverse stock splits are less common among seasoned companies that trade on one of the major U.S. stock exchanges.

If a reverse split is announced and actually occurs, proceed with caution. Reverse splits tend to go hand in hand with low-priced, high-risk stocks. This is especially true with reverse splits that result in a post-split share price that is many times the price of the stock's current price.

Here's how a reverse split works: Say a company announces a 200:1 reverse split. Once approved, investors will receive one share for every 200 shares they own. So, if you owned 5,000 shares of stock at a price of 10 cents per share worth a total of $500 before the reverse split, you would own 25 shares at a price of $20 each after the reverse split, maintaining that total value of $500. The amount of money you have invested doesn't change, just the number of shares you own.

The Role of Regulators

As the Securities and Exchange Commission (SEC) explains, "state corporate law and a company's articles of incorporation and by-laws generally govern the company's ability to declare a reverse stock split and whether shareholder approval is required."

If a company is required to file reports with the SEC, it may notify its shareholders of a reverse stock split in a number of ways, including on Forms 8-K,10-Qor10-K. Use the SEC's EDGARsearch tools to view these reports.

FINRA does not approve reverse splits, but it does process reverse stock splits as part of its functions related to company corporate actions in the OTC market. OTC companies must submit notice to FINRA 10 days prior to the record/effective date of the corporate action. Once a corporate action submission is successfully processed (which may take longer than 10 days), it will be posted to the OTC Daily List, where investors can learn about reverse stock splits and other company corporate actions, such as a merger or acquisition, payment of dividends or a company dissolution or liquidation.

Remember that a stock split—or a reverse stock split—does nothing to change the value of a company. How a stock performs in the long run will depend on multiple factors, not on how its shares are split.

Stock Splits (2024)

FAQs

Is it good for me if my stock splits? ›

Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth. But investors shouldn't buy a stock simply because they hope it'll rise in price after a split.

How do you solve stock splits? ›

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.

When you own 100 shares of a $100 stock that splits two for one you will now own? ›

Let's assume that you currently own 100 shares in a company with a share price of $100. If the company declares a two-for-one stock split, you would now own 200 shares at $50 per share post-split.

What happens after a stock split more than one answer may be correct? ›

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.

Do stocks usually go up after a split? ›

A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed. It can also increase the stock's liquidity. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split.

How often do stocks go up after a split? ›

The total value of the company remains the same after a split, as it simply divides existing shares into more shares with a lower price per share.

What are the disadvantages of a stock split? ›

Disadvantages of a Stock Split

The company wanting to split their stock must pay a great deal to have no movement in its over market capitalization value. A stock split isn't worthless, but it doesn't impact the fundamental position of a company and therefore doesn't create additional value.

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

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

What stocks are expected to split in 2024? ›

Investors looking for potential stock splits before they hit the news may want to consider these assets.
  • Broadcom (AVGO) Source: Sasima / Shutterstock.com. ...
  • Deckers Outdoor (DECK) Source: BalkansCat / Shutterstock. ...
  • Nvidia (NVDA) Source: Poetra.RH / Shutterstock.com.
Mar 20, 2024

Who approves stock splits? ›

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.

Did Walmart stock split? ›

Walmart becomes Wall Street's newest stock-split stock

26, Walmart enacted its 3-for-1 forward-stock split, which was first announced on January 30. Walmart CEO and president Doug McMillon noted the reasoning behind the split is to encourage employees to take part in Walmart's Associate Stock Purchase Plan.

What is the stock 100 rule? ›

The older you get, though, means you must cut back on the amount of risk in your portfolio. The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks.

Can a company undo a stock split? ›

A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade.

How many times has Amazon stock split? ›

Amazon (NASDAQ: AMZN) has had four stock splits since its initial public offering in 1997, with its most recent one occurring in June 2022 in a 20-to-one split. The company has enjoyed immense success over the years by leading two crucial sectors: e-commerce and cloud computing.

Should I sell before 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.

How do you 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).

Is bonus share good or bad? ›

When a company issues bonus shares out of profit or reserves, it reflects that the company is financially strong enough to issue more equity shares and has made profits. Also, bonus shares are a great way of rewarding shareholders, especially when companies are short of cash and hence cannot pay out cash dividends.

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