Stock Splits: What They Are, How They Affect Your Portfolio - NerdWallet (2024)

FAQs

Stock Splits: What They Are, How They Affect Your Portfolio - NerdWallet? ›

Key Takeaways. A stock split is when a company increases the number of its outstanding shares to boost the stock's liquidity. Although the number of shares outstanding increases, there is no change to the company's total market capitalization as the price of each share is split as well.

Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.

Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionally, while the market capitalization and the value of the company do not change.

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, the corporation issues additional shares to current shareholders, but your total basis doesn't change. Following a stock split, you must reallocate your basis between the original shares and the shares newly acquired in the stock split.

The case for buying before the split

A stock split doesn't change anything fundamental about a company or its stock. Though the per-share price will be lower, the maneuver doesn't impact valuation in any real way. That means that post-split, the stock actually could be more expensive than it was beforehand.

“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.

Stock splits do not impact the overall value of your assets. For an investor, the assets in your portfolio may undergo changes over time. They may increase or decrease in value, and sometimes they may be impacted by what's known as 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.

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.

Should you hold during a stock split? ›

While splits may lead to short-term price movements and increased trading, they don't change a company's underlying worth or an investor's proportional ownership. Investors should focus on a company's fundamental business prospects rather than being swayed by the cosmetic changes of a stock split.

While the split increases the number of outstanding shares in circulation, it does not change the company's overall value or affect Morningstar's view of its stock. “Splitting the stock shouldn't create economic value in theory, but it will make the company more accessible to smaller investors,” Colello explains.

Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits. For example, let's say you owned 10 shares of a stock trading at $100. In a 2-for-1 split, the company would give you two shares with a market-adjusted worth of $50 for every one share you own, leaving you with 20 shares.

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.

Example scenario

When a stock with a face value of ₹10 undergoes a 2:1 stock split, its face value reduces from ₹10 to ₹5. This results in doubling the number of shares owned, but the total investment value remains constant at ₹10.

A 2 for 1 stock split results in twice the number of shares at half the price. The holder of an option contract as a result of a 2 for 1 stock split will now have twice as many option contracts at half the strike price. A 3 for 2 stock split results in an additional . 5 shares per 1 share held.

The only aspects that are impacted are the number of shares outstanding and the par value per share. As you can see in the visual below, there is no impact to retained earnings and no impact on overall stockholders' equity.

A split-up is a financial term describing a corporate action in which a single company splits into two or more independent, separately-run companies. Upon the completion of such events, shares of the original company may be exchanged for shares in one of the new entities at the discretion of shareholders.

Are reverse stock splits good or bad? All things equal, a reverse stock split is neither good nor bad and has no impact on the value of the total company. However, it often carries a negative connotation as many of the companies doing them are countering a sharp drop in their share price.