Understanding Stock Splits

For instance, in a 1-2 reverse stock split, a stock that was trading for $10 is now worth $20 a share and if you had 10 shares, you now have five. After a split, the stock price will decline since the number of outstanding shares has increased. This, however, does not change the market capitalization of a company, and the value of your held shares will remain the same. If a company’s stock is trading for a few dollars a share and whipsawing how to do a bank reconciliation: step-by-step process investors with big price swings from day to day, those investors a large stake aren’t going to be happy. If you perform a 2-to-1 reverse split (whereby every two shares are turned into one), your share price doubles and maybe the sort skittish buyers creating that volatility will stop showing interest. A stock split is when a company issues more shares of stock to its existing shareholders without diluting the value of their holdings.

  • Investment newsletters nonetheless take note of the often positive sentiment surrounding a stock split.
  • When companies opt for a stock split, it increases the overall number of outstanding shares and lowers the value of each individual share.
  • Public exchanges such as the NASDAQ require stock to trade at or above $1.
  • 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.

The following guide, illustrated by examples, will look at how this process works, how it is applied, and how it can affect an investor’s portfolio. A share price that’s low enough is often perceived as having a lack of legitimacy. The phrase “penny stock,” for example, is widely accepted as one that implies a lack of respectability.

FAQs about stock splits

CaculatedSelf is not a registered broker-dealer or investment adviser. The information contained herein regarding available investments is obtained from third party sources. An ETF is a collection of hundreds or thousands of stocks or bonds, managed by financial experts, in a single fund that trades on major stock exchanges, like the New York Stock Exchange and Nasdaq. In February 2018, the Board of Directors approved a 2-for-1 split of the company’s common stock in the form of a 100% stock dividend.

Keep in mind that you may not sell your stock for several years after a split, so it doesn’t hurt to do a little research and figure out if the shares were split at any point after the initial purchase. Of course, you’ll want to adjust your basis each and every time the stock was split. Fortunately for investors, many brokerages will make the necessary adjustments when calculating the cost basis for a holding.

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. A stock can be split in as many ways as a company chooses, supplemented with ratios such as “2-for-1,” “3-for-1,” all the way up to “100-for-1″. For instance, in a 2-for-1 split, every single share held by an investor now becomes two.

Are stock splits risky?

Those other equities aren’t necessarily a better value, but casual investors sometimes make that assumption. To fight this perception and improve liquidity, companies will consider increasing their shares outstanding by issuing additional shares to shareholders, which proportionately lowers the share price. A reverse split reduces a company’s outstanding shares increasing per-share value.


However, the psychological value of a stock split can increase interest in the company’s equity. Reverse stock splits signal a company’s struggle to maintain, let alone grow, its stock price. Stock splits signal a company’s desire to keep the price of a single share within the reach of more investors. Among the survivors of reverse stock splits are AIG (AIG), Motorola (MSI), and Xerox (XRX). 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.

And the major exchanges actually require companies to maintain a certain share price to continue trading on the exchange. If your company’s share price plunges too far, you could be risking a market perception that you’re small potatoes or, worse, an embarrassing delisting that will likely spark a big decline. While there’s often a perception that stock splits add value to your portfolio, that’s not exactly the case. However, if there’s renewed investor interest in the stock as a result of the split, your holdings may become more valuable over the long term as the price ticks upward.

A company would primarily pursue this corporate action to bump its per-share price. Firstly, to avoid being delisted from a stock exchange for not meeting the minimum bid price required for a listing. Secondly, to attract big investors, as many institutional investors and mutual funds have policies against investing in stocks priced below a preset minimum per share.

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The process of a stock split is expensive, requires legal oversight, and must be performed in accordance with regulatory laws. The company wanting to split their stock must pay a great deal to have no movement in its over market capitalization value. Finally, as noted earlier, companies prefer to keep share prices relatively low to fine-tune stock-based compensation.

The borrowed shares are immediately sold in the expectation they will be decline in value, allowing the short-seller to profit by repurchasing them for less when closing out the trade. However, understanding stock splits remains important before you dip your toe into the stock market. In the end, there are some solid, very logical reasons for performing stock splits. However, some of the biggest reasons actually have more to do with public perception and crowd psychology than with sound, reasonable market dynamics. Despite the number of reasons given, not that many stock splits occur.

Right after the split takes effect, the number of shares outstanding would double to 40 million, while the share price would be halved to $50. Although both the number of shares outstanding and the market price have changed, the company’s market cap remains unchanged at (40 million shares x $50) $2 billion. As a result, more investors can buy the shares, and the existing shares maintain liquidity. While there is an issue with a reverse stock split, this strategy can help a company remain in business and bounce back from hard times over the long term.

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