In May 2011, Citigroup reverse split its shares one-for-10 in an effort to reduce its share volatility and discourage speculator trading. The reverse split increased its share price from $4.52 to $45.12 post-split. For example, in a reverse one-for-five split, 10 million outstanding shares at $0.50 cents each would now become 2 million shares outstanding at $2.50 per share.
Always check if prices are split-adjusted to avoid misinterpreting long-term price trends. A stock split is a corporate action in which a company issues additional shares to shareholders, increasing the total by the specified ratio based on the shares they held previously. When a stock splits, the company creating this split is often perceived to be a successful one. The fact that the share price is so high that it must split its stock indicates to investors that the company has been performing well, and its shares must be a good investment. The main benefit of a stock split is to make a company’s shares cheaper for small investors to buy.
However, being aware of split dynamics can provide insight into how market psychology often affects prices. A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share.
Stock splits explained
For instance, in a two-for-one split, each share is divided into two, doubling the number of outstanding shares. Interestingly enough, there are some famous stock splits which have been even larger. For example, Warren Buffett’s Berkshire Hathaway split its shares 50-for-1 back in 2010. More recently, Chipotle announced in March 2024 that it would go forward with a 50-for-1 stock split. A stock split occurs when a company makes its shares more affordable by dividing its existing shares into a larger number of less expensive ones.
It’s often compared with cutting a pizza into smaller slices—you have more pieces, but not more pizza. For example, a 1-for-3 reverse split is one that replaces every three shares owned by a company’s investors with a single share of stock. 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.
More shares, lower price
Two-for-one and 3-for-1 stock splits are relatively common, says Holden. While Apple (AAPL) and Tesla (TSLA) have gotten a lot of publicity for their 2020 stock splits, their 5-for-1 or 4-for-1 stock splits were uncommon choices. On the other hand, a reverse stock split is often aimed at helping a company meet the minimum requirements to remain listed on an exchange. A stock split, in and of itself, will not change the monetary value of your stake in a company.
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. While none of these suggest entirely rational decisions by traders, a more prosaic and far less flattering depiction of investors is just that they don’t do math well.
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.
Are Stock Splits Good or Bad?
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 lower price. For those investors, a stock split can provide a powerful motivator to get off the sidelines. When a company is concerned that its share price is too high or too low, it can opt for a stock split or a reverse stock split. A stock split can help a company lower its share price to appeal to new investors, while a reverse stock split can boost its share price and help preserve its listing on a major stock exchange. There’s another type of stock split, known as a reverse split, that works in the opposite way. Shares owned by existing investors are replaced with a proportionally smaller number of shares.
- For example, let’s say that a share of a company you want to purchase is trading for $2,500.
- A stock split can help a company lower its share price to appeal to new investors, while a reverse stock split can boost its share price and help preserve its listing on a major stock exchange.
- Existing shareholders were also given six additional shares for each share they owned prior to the stock split.
- However, a stock split doesn’t change the company’s value—it simply redistributes ownership into smaller, more affordable units.
There are some changes that occur as a result of a split that can impact the short position. The biggest change that happens in the portfolio is the number of shares shorted and the price per share. This helps ensure more people can access the shares and keeps existing shares liquid.
Whereas you owned one-eighth of the company before, as a result of the split you’ll now own two-sixteenths. It doesn’t matter if you own a stock before or after instructions 2020 a split because the value won’t change. A stock split is purely a mathematical decision that does not reflect the valuation of a company.
The bottom line on stock splits
This is important to keep in mind, as an investor may respond to such a split by thinking that their investment in a particular business is greater than it was before. There are several ways that a stock split can impact you as an individual shareholder. For existing shareholders, the result is the same — the total value of their shares remains consistent. Publicly traded companies have a set amount of outstanding shares available in the market.
A stock split is a multiplying or dividing of a company’s outstanding share count that doesn’t change its overall market value or capitalization. For example, if a company doubles its share count by giving investors one additional share of stock for every share they own, each shareholder will own twice as many shares of stock. However, the overall value of all outstanding shares won’t change since no additional capital will have been paid into the company.
If a company is going to perform well, it will before or after a split. A 2-for-1 stock split grants you two shares for every one share of a company you own. If you had 100 shares of a company that has decided to split its stock, you’d end up with 200 shares after the split.
Other management decisions regarding its stock—such as changes to a dividend payment or a new stock offering—have implications for the company’s fundamentals, and thus, your investment value. Management of a company might decide to do a forward stock split if they believe the price is relatively “high” or that it is trading outside of an “optimal” range. This decision is made by management based on their subjective views of the historical trading range of the stock and other factors. Because a what does it mean to normalize financial statements stock split doesn’t change the underlying value of your investment, you may not notice any more substantial changes than the number of shares in your investment account. A 2 for 1 stock split doubles the number of shares you own instantly.