Stock splits can seem confusing, but they’re actually a simple and common event in the stock market. In this guide, we’ll explain what a stock split is, how it works, why companies do it, and what it means for your portfolio.
A stock split happens when a company increases the number of its outstanding shares by issuing additional shares to current shareholders. While the number of shares you own multiplies, the price per share decreases proportionally, so the total value of your investment remains unchanged.
Think of it like cutting a pizza into more slices — you still have the same pizza, just more pieces.
How a Stock Split Works
Most stock splits are 2-for-1 or 3-for-1.
Example:
You own 10 shares at $10 each ($100 total value).
After a 2-for-1 split, you own 20 shares at $5 each ($100 total value).
Your overall investment value stays the same — you just have more shares at a lower price.
Why Companies Split Their Stock
Companies perform stock splits for several reasons:
1. Make Shares More Affordable
A high share price can feel expensive to new investors. Splits lower the price and make shares more accessible.
Apple’s 2020 4-for-1 split reduced its share price from nearly $500 to about $125.
Amazon’s 2022 20-for-1 split brought its $2,500 stock down to $124.
NVIDIA’s 2024 10-for-1 split lowered its $1,200 stock to $120.
2. Attract More Investors
Lower prices can boost demand. Research shows stocks often outperform the S&P 500 during the 12 months following a split.
3. Improve Liquidity
Cheaper shares are easier to buy and sell, increasing trading volume.
Why Some Companies Avoid Stock Splits
Not every company splits its stock. Some choose to keep their share price high to maintain an image of prestige and exclusivity.
Example: Berkshire Hathaway’s Class A shares have never split and now trade for nearly $500,000. The company offers Class B shares at a lower price so more investors can participate.
Risks of Stock Splits
While stock splits can encourage buying, they don’t guarantee higher prices. If negative news or a market downturn follows a split, the price can fall further — sometimes enough to worry investors or even threaten exchange listing requirements.
What is a Reverse Stock Split?
A reverse stock split does the opposite: it reduces the number of shares and raises the price per share.
Example: A 1-for-2 reverse split turns 100 shares into 50, with the same total value.
Companies typically use reverse splits when:
Their share price is too low and at risk of delisting.
They want to boost investor confidence.
Recent examples:
Sirius XM Holdings (2024): 1-for-10 reverse split to exit penny-stock status before spinning off.
Allbirds (2024): 1-for-20 reverse split to regain Nasdaq compliance and avoid delisting.
Reverse/Forward Stock Splits
Some companies combine a reverse split and a forward split. This removes very small shareholders (who are cashed out) and then re-adjusts share counts for remaining investors, reducing administrative costs.
Key Dates for Stock Splits
There are three important dates to watch:
Announcement Date: When the company announces the split ratio.
Record Date: The date you must own shares to receive new ones.
Effective Date: When the split actually happens and your account updates.
Stock Splits and Fractional Investing
Many platforms now allow fractional investing, meaning you can invest a fixed dollar amount instead of buying full shares. When a stock splits, fractional shares are adjusted just like regular shares, so your total value stays the same.
Investor Impact
A stock split doesn’t change your ownership percentage — you just hold more shares at a lower price.
However, because lower prices attract new investors, demand may rise and potentially drive prices higher (but not always).
Example: Tesla’s 2022 3-for-1 split saw shares drop nearly 18% the day after the split, showing there are no guarantees.
Stock splits don’t change the fundamental value of your holdings, but they can make shares more affordable, improve liquidity, and attract more investors. If you’re a long-term investor, splits may present new opportunities to buy shares at a lower price point.
FAQs
Q1.Is a stock split good or bad?
A. It’s neither — it just lowers the share price while keeping your total investment value the same.
Q2. Do mutual funds split like stocks?
A. Yes, but rarely. However, mutual funds benefit if companies they own split their stock.
Q3. Do stock prices rise after a split?
A. Historically, they often outperform the market within a year, but results vary.
Read more Article: Long Term Stock Investing | Online Business
