Stock Splits: A Closer Look at Their Effects

Though the split reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market capitalization of the company stayed the same (at approximately $131 billion). In May 2011, Citigroup reverse split its shares one-for-10 in an effort to reduce its share volatility and discourage speculator trading. The reverse split increased its share price from $4.52 to $45.12 post-split. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split.

The split increases the number of shares outstanding, but the company’s overall value does not change. Immediately following the split the share price will proportionately adjust downward to reflect the company’s market capitalization. If a company pays dividends, the dividend per share will be adjusted accordingly, keeping overall dividend payments the same.

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What do stock splits mean for you as an investor?

1. In the case of a short investor, prior to the split, they owe 100 shares to the lender.
2. While you may have paper stock certificates for the original shares you purchased, don’t necessarily wait for new ones to appear in the mail following a stock split.
3. A stock split also often increases the share price after its initial reduction.
4. 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.
5. When an investor shorts a stock, they are borrowing the shares with the agreement that they will return them at some point in the future.
6. For example, if an investor shorts 100 shares of XYZ Corp. at $25, they will be required to return 100 shares of XYZ to the lender at some point in the future.

Most investors are more comfortable purchasing, say, 100 shares of a $10 stock as opposed to 1 share of a $1,000 stock. So when the share price has risen substantially, many public companies end up declaring a stock split to reduce it. Although the number of shares outstanding increases in a stock split, the total dollar value of the shares remains the same compared with pre-split amounts, because the split does not make the company more valuable. But suppose that other stocks in the financial sector are trading well below this figure. Those other equities aren’t necessarily a better value, but casual investors sometimes make that assumption. To fight this perception and improve liquidity, companies will consider increasing their shares outstanding by issuing additional shares to shareholders, which proportionately lowers the share price.

For current holders, it’s good to hold more shares of a company but the value doesn’t change. The strength of a company’s stock comes from its earnings, not the price of its stock. In the case of a short investor, prior to the split, they owe 100 shares to the lender. After the split, they will owe 200 shares (that are valued at a reduced price). If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender.

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But naturally, investors with more complicated positions in the stock—for instance, if they’re short-selling it or trading options—may wonder how the split affects those trades. In both these cases, your trades are adjusted in a way that neutralizes the impact on your investment. A stock split is a way for a company to increase the number of shares outstanding without issuing new shares, an event that would dilute the value of existing shares. A stock split also often increases the share price after its initial reduction. As the reduced price makes a stock cheaper, more investors are able to purchase it, driving up the demand and, therefore, the price.

More shares, lower price

All publicly traded companies have a set number of shares that are outstanding. A stock split is a decision by a company’s board of directors to increase the number of shares outstanding by issuing more shares to current shareholders. One of the common questions that investors have after a stock split is whether their new shares are eligible for previously declared dividends.

Following the split you would own 100 shares but the price would be adjusted to $15 per share. Similarly, you own the same $1,500 in dollar value that you had before the stock split. When a stock reddit meme stocks including gamestop splits, the company creating this split is often perceived to be a successful one. The fact that the share price is so high that it must split its stock indicates to investors that the company has been performing well, and its shares must be a good investment. When companies opt for a stock split, they increase the overall number of outstanding shares and lower the value of each individual share.

A stock split is used primarily by companies that have seen their share prices increase substantially. 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. After a split, the stock price will be reduced (because the number of shares outstanding has increased). In the example of a 2-for-1 split, the share price will be halved.

With its 2-to-1 split, Apple grants you one additional share, so you now have a total of two. The two how to predict forex market trends shares have the same monetary value as the one share pre-split. If a company announces a 2-for-1 split, the number of shares doubles, so the original pie will be divvied up into 16 slices.

Following one of these events, you may be able to purchase shares of a stock that were previously unaffordable because their price was too high. For starters, a share split results in a greater number of shares outstanding that simply have a proportionately lower price. This development can prove bullish, as reducing the price of a share may influence investors by making them think it is a better deal and motivating them to purchase it.

The main purpose of a stock split is to reduce the price of an expensive stock — especially when compared with price levels of peers in the industry — making it accessible to more investors. If a stock costs less, it might be easier for an investor to incorporate it into their portfolio, especially if the shares were rather expensive before a share split. While neither the company’s value nor that of your investment changes in a split, it’s important to understand how stock splits can impact your portfolio. When a company splits its shares, the value of the shares also splits. For example, suppose the shares of XYZ Corp. were trading at $20 at the time of the two-for-one split; after the split, the number of shares doubled, and the shares traded at $10 instead of $20. If an investor has 100 shares at $20 for a total of $2,000, after the split, they will have 200 shares at $10 for a total of $2,000.

In other words, the number of outstanding shares in the market will triple. While the number of shares owned changes after a stock split, the split itself does not change your investment value. A stock split is when a company issues more shares of stock to its existing shareholders without diluting the value of their holdings. For example, let’s say you start with 100 shares worth $100 a piece.