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WHAT IS A STOCK SPLIT—AND WHAT DOES IT MEAN WHEN ONE HAPPENS?

Miranda Marquit,  John Schmidt
Contributor,  Editor

Updated: Jul 22, 2021, 12:11pm

Editorial Note: Forbes Advisor may earn a commission on sales made from partner
links on this page, but that doesn't affect our editors' opinions or
evaluations.
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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.


WHAT IS A STOCK SPLIT?

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. While the number of shares outstanding change, the overall
valuation of the company and the value of each shareholder’s stake remains the
same.

Say you have one share of a company’s stock. If the company opts for a 2-for-1
stock split, the company would grant you an additional share, but each share
would be valued at half the amount of the original. After the split, your two
shares would be worth the same as the one share you started with.


WHAT IS A REVERSE STOCK SPLIT?

A reverse stock split reduces a company’s number of shares outstanding. If you
owned 10 shares of a stock in a company, for example, and the board announced a
2-for-1 reverse stock split, you’d end up with five shares of stock. The total
value of your shares would remain consistent. If the 10 shares were valued at $4
per share before the reverse split, the five shares would be valued at $8 per
share after the reverse split. In either case, the total value of your
investment remains $40.


WHY DO COMPANIES SPLIT STOCK?

In many cases, a stock split is a strategy used by companies to meet a specific
goal, says Amanda Holden, a former investment counselor and the founder of
Invested Development, a course aimed at helping women learn about investing.

Companies often like the idea of creating more liquidity by making a price more
attractive and attainable for a larger number of people. “You might not be able
to buy Apple at $500, but you could buy it at $125,” she says.

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.

“You can get kicked off an exchange if your price drops too far,” Holden says.
“A reverse stock split consolidates your shares in a way that results in a
higher per-share price that can keep you trading on a public and accessible
exchange.”

This helps ensure more people can access the shares and keeps existing shares
liquid. While a reverse stock split is often thought of as a red flag for
investors, in the long run, it can help a company survive and recover from a
rough patch.


WHAT IS A 2 FOR 1 STOCK 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.

A 2 for 1 stock split doubles the number of shares you own instantly.
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 more unusual.


HOW DOES A STOCK SPLIT AFFECT YOU?

Because a 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.

“There’s no particular advantage for those who already have shares,” Holden
says. “Nothing about ownership is going to change. You might have twice as many
shares, but they are at half the price, so it balances out.”

For those who aren’t already shareholders, though, a stock split can provide
motivation to buy. For example, if you couldn’t afford a share of Tesla before
its recent stock split, you might be able to get one now.

The ability for more people to buy a stock can bump up its price, which in turn
may actually increase a company’s value, at least temporarily, Holden says.

“With more people able to buy, you see more demand, and the price can go up. If
you have more shares, this can be beneficial to you if you hold on,” Holden
says. “However, that stock and total value bump is generally temporary. To see
long-term gains, you usually need to keep holding that stock to get the benefit
over time.”


ARE STOCK SPLITS IMPORTANT WITH WIDESPREAD FRACTIONAL SHARE INVESTING?

As fractional investing becomes more popular and widespread, some experts
speculate that stock splits will become less important as fractional shares
allow you to buy into a company at virtually any price point.

Currently, investing apps like Robinhood, Stash, M1 Finance and SoFi Invest, as
well as legacy brokerages like Charles Schwab and Fidelity, allow clients to buy
fractional shares of certain stocks and exchange-traded funds (ETFs).

“It’s hard to say how fractional investing will impact investing and stock
splits since there isn’t a lot of data right now,” Holden says. “But I think it
will take significant time before fractional investing eliminates the need for
stock splits.”

And that’s not even considering the psychological aspect of stock splits.
“Humans love a round number,” says Holden. “There’s something about knowing you
have the money to buy a full share that motivates many investors.”


THE BOTTOM LINE

In the end, a stock split—or even a reverse stock split—doesn’t have a huge
practical impact on a company’s current investors. 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.

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Forbes Advisor adheres to strict editorial integrity standards. To the best of
our knowledge, all content is accurate as of the date posted, though offers
contained herein may no longer be available. The opinions expressed are the
author’s alone and have not been provided, approved, or otherwise endorsed by
our partners.
Miranda Marquit
Contributor

Miranda Marquit has been covering personal finance, investing and business
topics for almost 15 years. She has contributed to numerous outlets, including
NPR, Marketwatch, U.S. News & World Report and HuffPost. Miranda is completing
her MBA and lives in Idaho, where she enjoys spending time with her son playing
board games, travel and the outdoors.

John Schmidt
Editor

John Schmidt is the Assistant Assigning Editor for investing and retirement.
Before joining Forbes Advisor, John was a senior writer at Acorns and editor at
market research group Corporate Insight. His work has appeared in CNBC +
Acorns’s Grow, MarketWatch and The Financial Diet.

First Published: Jul 22, 2021, 12:11pm
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