What is a stock split?

Stock splits explained

A stock split happens when a company’s board of directors decides to increase the number of shares outstanding, giving current investors more shares but with a lower value.

Stock splits are typically defined by a split ratio, like 2-for-1 or 4-for-1.

In a 2-for-1 stock split, investors get an additional share for each share they currently hold, with shares now worth half their value before the split.

A 4-for-1 stock split gives shareholders four times the number of shares in their portfolio, with each share worth a quarter of its previous value.

More: How to sell stock

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Why would a company split stock?

Stock splits typically occur when a company’s share price becomes too high for everyday people to buy.

For most casual investors, stocks going for hundreds or thousands of dollars a share aren’t affordable — unless they use an investment app that lets them buy fractional shares.

Splitting a stock makes individual shares more affordable without changing the company’s overall value in the market and makes those shares easier to buy and sell.

In some cases, stock splits can also bump up share prices over time. Smaller investors may jump at the chance to purchase low-cost shares of a blue chip stock after a split, which will in turn boost demand and drive up the price.

A 2019 Nasdaq study found that, following a split, big companies saw their stock outperform the market by an average of almost 5% over the next year.

Do investors lose money if a stock splits?

If you already own shares in a company that splits its stock, the split won’t change the value of your investment.

It’s true that your shares will be worth less, but you’ll also own a proportionally larger number of them.

And as we mentioned above, a stock split generally spells good news for shareholders, since the increased demand from smaller investors may cause shares to appreciate in price.

Stock split example: Apple

Apple’s last stock split back in August 2020 was the fifth in the tech giant’s history.

The stock split on a 4-for-1 basis, which meant that Apple shareholders’ portfolios now contained four times the number of shares they held previously, and each share will now be valued at a quarter of its previous worth.

So, if you owned 20 shares of Apple stock (APPL), valued at around $500 right before the split, your total investment would be worth $10,000.

Once the split is over, you’d own 80 shares of APPL, worth around $125 a piece. Your total investment of $10,000 would stay the same.

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What is a reverse stock split?

In tough times, a company may decide to do a reverse stock split. As the name suggests, it’s the opposite of a traditional split.

In a reverse split, shareholders get fewer shares than they previously held but at a higher price per share.

So if you held 200 shares in a company that were worth $5 each, after a 1-for-4 reverse split you’d have 50 shares worth $20 each.

Reverse splits typically happen when a company’s share price is at risk of dropping so low that the stock gets kicked off a stock exchange. The New York Stock Exchange, for instance, typically deals in stocks worth a dollar or more.