Stock Splits: How They Work and Why They Happen

The dividends paid by shares adjust proportionately following a stock split. In other words, you should receive the same amount of dividends after the split as you did before it. Publicly traded companies have a set amount of outstanding shares available in the market. In most cases, your brokerage will automatically adjust your trades to reflect the new price of a stock that has split. Still, investors should take extra care when reporting a post-split cost basis and be sure to re-submit any stop orders placed prior to the split. When investors believe they can buy more shares at a lower price, they seem to perceive that as a “deal” for the stock, even though the value hasn’t really changed.

Stock Splits vs. Reverse Stock Splits

For many investors, this will be the first time that they’ve dealt with a stock split. It’s understandable that you might have questions about how it works. It’s a relatively painless process when a company splits its shares, but it’s still important to have a good sense of what’s going to happen along the way.

What happens when a stock splits

Stocks that trade above hundreds of dollars per share can result in large bid/ask spreads. A stock split does nothing to the company’s market capitalization. Each stockholder receives an additional share for each share held in a two-for-one stock split but the value of each share is reduced by half. Two shares now equal the original value of one share before the split. In general, dividends declared after a stock split will be reduced proportionately per share to account for the increase in shares outstanding, leaving total dividend payments unaffected. The dividend payout ratio of a company shows the percentage of net income, or earnings, paid out to shareholders in dividends.

How Do Stock Splits Affect Short Sellers?

A look at GameStop’s recent results should provide insight into the company’s ongoing prospects, which is a better gauge than an arbitrary stock split. For the first quarter, revenue of $1.38 billion grew 8% year over year. At the same time, the company’s net loss of $158 million surged 136%, a curious development for a mature company.

Common Stock Split Ratios

Our estimates are based on past market performance, and past performance is not a guarantee of future performance. Given the reduced share price, you are more likely to sell your shares more easily because there are more potential buyers in the market. If we multiply the share price by the shares owned, we arrive at $15,000 as the total value of your shares. If the company declares a two-for-one stock split, you would now own 200 shares at $50 per share post-split. More specifically, an abnormally high share price can prevent retail investors from diversifying their portfolios. With all the hype about Apple’s stock split, it’ll be good to get the mechanics over with.

NVIDIA Announces Four-for-One Stock Split, Pending Stockholder Approval at Annual Meeting Set for June 3

Stock splits are a way for companies to increase their overall liquidity. Similarly, in a stock split, it is very important to remember that the price of the share also is reduced. For example, if a company board announces a 2-for-1 split, then you get one extra share for each share you own–but the share price will be halved. In this example of a 2-for-1 split, if you had one share of Company X at $10 per share, you now have two shares of Company X at $5 per share. For instance, in July 2009, the center of the financial crisis, the American International Group, or AIG, reverse split its shares one for 20 to stabilize its stock price.

When companies opt for a stock split, they increase the overall number of outstanding shares and lower the value of each individual share. But that doesn’t mean the overall valuation of the company changes. For most trading activity, the effect of a stock split is pretty straightforward.

  1. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before.
  2. The receipt of the additional shares will not result in taxable income under existing U.S. law.
  3. Usually, reverse stock splits are announced by companies that have low share prices and want to increase them–often to avoid being delisted.
  4. A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company.
  5. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

They may not appear immediately after the market close on July 21 as the process and the timetable can vary slightly from brokerage to brokerage. Stock splits are a way a company’s board of directors can increase the number of shares outstanding while lowering the share price. It’s a tactic for making a stock more attainable to smaller investors, particularly when its price has ratcheted sky-high over time. A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed. Let’s say the company’s board of directors decides to split the stock 2-for-1.

If you then sell it for $125 per share, you’ll have a $25 per share gain — not bad based on the $400 you paid for pre-split shares. Apple hasn’t yet declared a dividend for the period after the split. However, what usually happens is that the per-share dividend payment gets adjusted to reflect it. So for instance, Apple just paid an $0.82 per share quarterly dividend in early August. After the 4-for-1 split, it’s likely that the company will declare next quarter’s dividend in the amount of $0.205 per share — one-fourth the size of the old dividend.

It’s worth noting that the newly issued shares might not be available immediately on June 10. Timetables can vary slightly from brokerage to brokerage, so it can often take several days for the new post-split shares to be reflected in investors’ accounts. 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. Typically, the underlying reason for a stock split is that the company’s share price is beginning to look expensive.

All publicly traded companies have a set number of shares that are outstanding. A stock split is a decision by a company’s board of directors to increase the number of shares outstanding by issuing more shares to current shareholders. Certain mutual funds may not invest in stocks priced below a economic lot size model preset minimum per share. A company might also opt for a reverse split to make its stock more appealing to investors who may perceive higher-priced shares as more valuable. Most investors are more comfortable purchasing, say, 100 shares of a $10 stock as opposed to 1 share of a $1,000 stock.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. After the split, your holdings are still worth $15,000, as shown by the calculation below.

This is especially true now with more and more investors having access to low-cost trading platforms. Buying and selling stocks is now easier than ever, and for many investors these recent splits might be an entry point into companies they have long admired. For example, in June 2014, Apple split seven for one, meaning each share became seven. Apple went from having roughly 861 million outstanding shares at about $645 per share to about six billion shares at about $92 per share. Despite there being more shares, the total value of Apple’s market cap remained the same at roughly $555 billion.

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