 | What are stock splits? –Stock splits happen when a company increases its outstanding shares to make the stock more affordable to investors. For example, instead of a stock trading at $1,000 per share, a 10-for-1 stock split would allow it to trade for $100 per share (FIGURE 1) while the number of held shares would increase tenfold. This is also called a forward split. |
 | Benefits of forward splits – Companies tend to implement forward stock splits when the outlook for continued growth and profitability is strongest. Making it easier for investors to buy shares at a lower share price also helps companies broaden their base of ownership. From time to time, stock splits are followed by a bump in stock performance—but not always. |
 | Is the split worth it? – Stock splits have no tangible impact on a company’s total value—they simply create more shares at more affordable prices. Nor does a split change the total value of an investor’s portfolio holding per se. For companies, stock splits can be an expensive process requiring lots of legal oversight and adherence to regulatory rules. |
 | No taxes owed! – Stock splits aren’t a taxable event, but an investor’s cost basis in a stock should be adjusted to reflect a split. For example, after a 2-for-1 stock split, the cost basis of each share owned after the split will be half of what it was before the split. |
 | Do mutual funds split like individual stocks? – Yes. Mutual funds split the same way individual companies split, but it’s much less common. These splits help to bring in new money and make the fund more marketable. Mutual fund investors can benefit when individual companies do stock splits if the fund they own holds those companies. |
 | Do stock splits benefit investors? –It’s nice to own more shares after a split, since the reduced per-share price might mean there’s room for greater potential price growth. But investors shouldn’t buy a stock simply because they hope it’ll rise in price after a split. Over the long term, a company’s value is determined by its earnings, not its stock price. |
 | A recent example –In early 2024, the per-share price of Walmart, the retail giant, had risen close to $182.00—a high barrier for many ordinary investors in the view of the company’s management. In late January 2024, Walmart announced a 3-for-1 stock effective February 26. After the split, the shares traded at a more affordable $60.45. |
 | What is the most common stock split ratio? – A 2-for-1 stock split is the most common ratio. Three-for-two splits are also common, but fractional splits are not unheard of. In March 2024, Tootsie Roll Industries Inc., the confectionary manufacturer famous for the iconic Tootsie Roll candy, implemented a 1.03-for-1 split. |
 | What's a reverse split? – In a reverse stock split, a company decides to decrease the number of outstanding shares to make the stock more expensive to investors. For example, instead of a stock trading at $5 per share, a 10-for-1 reverse stock split would allow it to trade for $50 per share (FIGURE 2). Shareholders end up with 10 fewer shares for each share formerly held. |
| But isn't a cheaper share price better? – Not always. A stock price might sink so low that a company’s reputation can be put at risk. Other times, a price that dips below a certain threshold can cause the stock to be delisted from an exchange or dropped from some mutual-fund holdings. Reverse splits are sometimes seen as a sign of company turmoil. |
FAQs
What you need to know about stock splits? ›
A stock split is when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company's market value. It's akin to cutting a cake into smaller slices; you end up with more pieces, but the total amount stays the same.
What is the most important thing to remember about a stock split? ›Key Points
A stock split increases the number of outstanding shares; the share price adjusts in proportion to the change. A stock split won't change a company's fundamentals, but it makes shares more affordable for smaller investors.
Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to smaller investors and provide greater marketability and liquidity in the market.
Is there a downside to stock splits? ›Disadvantages of a Stock Split
A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.
In a stock split, a company divides its existing stock into multiple shares to boost liquidity. Companies may also do stock splits to make share prices more attractive. For shareholders, the total dollar value of their investment remains the same because the split doesn't add real value.
Should you buy a stock right after it splits? ›It depends on whom you ask. Some analysts say stocks that split tend to outperform the broad market S&P 500 index in the 12 months following the split announcement. Others say a stock split isn't a reliable indicator of whether a stock's value will increase or decrease over time.
What is the best reason for stock split? ›Companies resort to stock split when they realise that the price of their shares are either too steep or are beyond the price levels of peer companies. For eg, if a company goes for a 1:10 stock split, a stock with face value of INR 100 is divided into 10 shares with a face value of INR 10 each.
What is a major objective of a stock split? ›Companies typically engage in a stock split so that investors can more easily buy and sell shares, otherwise known as increasing the company's liquidity. Stock splits divide a company's shares into more shares, which in turn lowers a share's price and increases the number of shares available.
What does 10 for 1 stock split mean? ›On that day, the stock's price will be split, or divided, by 10. That means the price will convert to a tenth, or 10%, of the current value, and existing shareholders will receive ten shares for every one share owned.
Do stock prices go up after a split? ›From time to time, stock splits are followed by a bump in stock performance—but not always. Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices.
What is a 5'10 stock split? ›
A stock split or share split is about reducing the par value of a stock. For example, reducing the par value of the stock from Rs. 10 to Rs. 5 is a 2:1 stock split and reducing the par value from Rs.
What is the primary reason for declaring a stock split? ›When a company's stock price gets too high, fewer buyers will pay that high price. By splitting the stock, the company essentially lowers the price per share, making it more affordable and attractive to potential investors.
How to take advantage of a stock split? ›You have two basic options. You can buy the shares beforehand while the price per share remains high. You will likely hope to profit from a rise in the share value with the excitement surrounding the stock. You can also elect to wait until after the split and then take advantage of the lower price per share.
What usually happens after a stock split? ›A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder's stake remains the same.
Do stock splits affect performance? ›A stock split divides each share into multiple new ones, effectively decreasing the price of each share. However, it does not affect the stock's overall market value.
Do stocks usually go up after a split? ›“Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index,” according to the BofA Global Research's research investment committee.
Is it better to buy before or after a reverse stock split? ›One way is to buy shares of the company before the reverse split occurs with the plan to sell them soon afterwards. This can be profitable if the company's stock price increases after the split. Another way to make money from a reverse stock split is to short sell the stock of the company.
Do stock splits matter anymore? ›With no overall trend, this data suggests stock splits are just cosmetic. “A split does not change the economic value of a company; it only changes the proportionate amount of ownership each share represents,” says Sekera.
Do companies succeed after a reverse split? ›Just remember, most companies that execute reverse stock splits falter, and many don't survive. This is speculative investing, so make sure you do your homework. Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry.