What is a Stock Split?

What is a stock split?

Here is a definition of a stock split. It is a situation when a company decides to increase the number of shares and lower the share price simultaneously. A split is done with a particular ratio that a company usually picks up and announces in advance.

For example, let’s take an XYZ company with a $100 price per share, which undergoes a 4:1 split. In this case, you as an investor go from having one share at $100 to four shares at $25 each. Note that the overall stock value doesn’t change. In the end, you still have shares for $100—only four instead of one.

Many famous companies experienced stock splits, for example, Tesla (5:1 stock split), Apple (4:1 stock split), and Nvidia (4:1 stock split). In 2022, Amazon plans to go through a stock split with a 20:1 ratio.

Why companies do stock splits

So why split stocks? Every company has its reasons for that. First of all, a stock split can improve trading liquidity. When a company’s share price gets very high, it may attract fewer investors. A stock split helps the stock to seem more affordable and encourages new investors to buy the stock.

Secondly, a company may want to change the per-share price when there is a possibility of future growth. So that after the split, the growth won't stop but will take a more rapid pace.

When do companies split stock?

A stock split may have a meaning that a firm is growing and succeeding and that its stock price has increased. In some cases, a stock split is done with the intention to boost the stock price to increase even more. Also, as we mentioned before, a stock split is a way to increase a stock's liquidity when a company wants to attract new investors.

One more thing you need to know about is a reverse stock split. In this case, a company reduces the number of shares and increases the share price. For example, you hold ten shares, $10 each. A company does a reverse stock split with a 1:10 ratio, and now you have only one share at a $100 price.

Unlike a common split, a reverse one may be a red flag and can even provoke the selling of the securities. There is an opinion that it is a sign of a company not doing well. So, in this case, if you are not already an investor in this company, you may think twice before buying the stock.

If you still want to go for the stock, it’d be good to analyze in advance what a stock split means for this company. And remember about the charts: track the price for reversals.

How does a split impact stocks you own?

The first thing we should say is that almost nothing will change. No changes to the company's market cap which stock you own happen. You, as an investor, will be in the same position as before.

In other words, you will simply own more shares than before (mind the change of the share’s price). Each share individually will represent a smaller percentage of the ownership, but the overall ownership percentage is the same.

If you are lucky enough, you may notice a boost in the price after the stock split. Usually, in such cases, all the public attention goes to the stock, and after the split, more people want to trade it so that the price can go up. Remember, though, that it depends on many other factors, so there is no way to say it for sure.

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2024-05-21 • Updated

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