What are stock splits and how do they work? (2024)

FAQs

What are stock splits and how do they work? ›

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.

A stock split is a decision by a company's board to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion. Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits.

It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.

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.

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.

A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares. Remaining relevant to investors and avoiding share delisting are the most common reasons corporations pursue this strategy.

While the number of shares owned changes after a stock split, the split itself does not change your investment value.

Overall, companies that split their stock saw an average total return of 25.4 percent in the 12 months that followed the announcement of their split.

Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.

Why don't stocks split anymore? ›

Stock splits vs. stock spinoffs. One reason why there are fewer splits now than in 2000 has to do with the way retail investing has shifted. Back in 2000, broad-market index funds were relatively small factors and retail investors typically bought shares of individual companies.

Mechanics of a stock split

For example, if an investor owns 100 shares of Company XYZ at ₹800 per share, the total investment value is Rs. 80,000. Following a 2-for-1 stock split, the investor would hold 200 shares at ₹400 per share, with the total investment value staying at Rs. 80,000.

Stock splits are purely superficial

Altering a company's share price and outstanding share count by the same factor has no impact on its market cap or operating performance.

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.

For example, a 1-to-4 (or 1:4) reverse stock split means that a person with 4 shares now has 1, and each of those shares are now worth 4 times the previous value. In a 1-to-3 reverse stock split, a person with 3 shares now has 1 share. Subsequently, each of those shares is now worth 3 times the previous value.

When a company splits its stock, that means it divides each existing share into multiple new shares. In a 20-1 stock split, every share of the company's stock will be split into 20 new shares, each of which would be worth one twentieth of the original share value.