 | What are stock splits? –Stock splits happen when a company increases its outstanding shares to make the stock more affordable to investors. For example, instead of a stock trading at $1,000 per share, a 10-for-1 stock split would allow it to trade for $100 per share (FIGURE 1) while the number of held shares would increase tenfold. This is also called a forward split. |
 | Benefits of forward splits – Companies tend to implement forward stock splits when the outlook for continued growth and profitability is strongest. Making it easier for investors to buy shares at a lower share price also helps companies broaden their base of ownership. 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. Nor does a split change the total value of an investor’s portfolio holding per se. For companies, stock splits can be an expensive process requiring lots of legal oversight and adherence to regulatory rules. |
 | No taxes owed! – Stock splits aren’t a taxable event, but an investor’s cost basis in a stock should be adjusted to reflect a split. For example, after a 2-for-1 stock split, the cost basis of each share owned after the split will be half of what it was before the split. |
 | Do mutual funds split like individual stocks? – Yes. Mutual funds split the same way individual companies split, but it’s much less common. These splits help to bring in new money and make the fund more marketable. Mutual fund investors can benefit when individual companies do stock splits if the fund they own holds those companies. |
 | Do stock splits benefit investors? –It’s nice to own more shares after a split, since the reduced per-share price might mean there’s room for greater potential price growth. But investors shouldn’t buy a stock simply because they hope it’ll rise in price after a split. Over the long term, a company’s value is determined by its earnings, not its stock price. |
 | A recent example –In early 2024, the per-share price of Walmart, the retail giant, had risen close to $182.00—a high barrier for many ordinary investors in the view of the company’s management. In late January 2024, Walmart announced a 3-for-1 stock effective February 26. After the split, the shares traded at a more affordable $60.45. |
 | What is the most common stock split ratio? – A 2-for-1 stock split is the most common ratio. Three-for-two splits are also common, but fractional splits are not unheard of. In March 2024, Tootsie Roll Industries Inc., the confectionary manufacturer famous for the iconic Tootsie Roll candy, implemented a 1.03-for-1 split. |
 | What's a reverse split? – In a reverse stock split, a company decides to decrease the number of outstanding shares to make the stock more expensive to investors. For example, instead of a stock trading at $5 per share, a 10-for-1 reverse stock split would allow it to trade for $50 per share (FIGURE 2). Shareholders end up with 10 fewer shares for each share formerly held. |
| But isn't a cheaper share price better? – Not always. A stock price might sink so low that a company’s reputation can be put at risk. Other times, a price that dips below a certain threshold can cause the stock to be delisted from an exchange or dropped from some mutual-fund holdings. Reverse splits are sometimes seen as a sign of company turmoil. |
FAQs
What is the most important thing to remember about a stock split? ›
Stock splits: What you need to know. A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not.
What are 3 benefits to stock splits? ›A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed. It can also increase the stock's liquidity. 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.
What happens in a 10 for 1 stock split? ›For example, instead of a stock trading at $1,000 per share, a 10-for-1 stock split would allow it to trade for $100 per share (FIGURE 1) while the number of held shares would increase tenfold. This is also called a forward split.
Is there a downside to stock splits? ›Another risk of a stock split is the reduction in the face value of a share. If the company's performance plummets in the future, the face value will go down further in the market.
Do stocks usually go up after a split? ›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.
Which stock is splitting in 2024? ›In January, I wrote that Chipotle Mexican Grill could split its stock in 2024. Sure enough, the company approved a 50-for-1 split two months later. Shares have risen 2% since the announcement, possibly because investors are excited.
What are the pros and cons of a stock split? ›- Pro: Makes shares more affordable. ...
- Pro: May trigger renewed investor interest. ...
- Con: Could trigger volatility. ...
- Con: Does not add any new value: At least in the short term, the total value of your assets for the stock in question remains the same.
A stock split doesn't make investors rich. In fact, the company's market capitalization, equal to shares outstanding multiplied by the price per share, isn't affected by a stock split. If the number of shares increases, the share price will decrease by a proportional amount.
Should I buy before or after a stock split? ›Does it matter to buy before or after a stock split? If you buy a stock before it splits, you'll pay more per share than what it'll cost after it splits. If you're looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.
What is the biggest stock split in history? ›Chipotle Mexican Grill Share Price: 50:1: Biggest Stock Splits in History! Mega Restaurant Company Fixes Record Date - Check Details | Markets News - Times Now.
Is a reverse split bad? ›
Many times reverse splits are viewed negatively, as they signal that a company's share price has declined significantly, possibly putting it at risk of being delisted. The higher-priced shares following the split may also be less attractive to certain retail investors who prefer stocks with lower sticker prices.
Has a reverse split ever worked? ›In rare cases, a reverse split buys a company the time it needs to get back on track. For instance, a reverse split worked for internet travel giant Priceline, now Booking Holdings (BKNG 3.79%), which did a 1-for-6 reverse split following the internet tech bust.
Why do companies avoid stock splits? ›Some companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige. A company trading at $1,000 per share, for example, will be perceived as more valuable even though the firm's market capitalization may be the same as a company whose shares trade at $50.
What is 100 shares of stock called? ›In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.
Should I sell before a stock split? ›Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.
What is a major objective of a stock split? ›The major objective of a stock split is to reduce the market price per share of the stock.
What is the primary purpose of a stock split? ›By splitting the stock, the company essentially lowers the price per share, making it more affordable and attractive to potential investors. The number of outstanding shares will rise due to a stock split, while the par value and market price will drop.
Is it better to buy stock before or after a split? ›Does it matter to buy before or after a stock split? If you buy a stock before it splits, you'll pay more per share than what it'll cost after it splits. If you're looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.
What is the best reason for opting for the stock split? ›Stock splits are typically enacted to make shares more affordable for retail investors, potentially boosting liquidity by attracting a broader investor base. Lower share prices may also enhance trading activity and accessibility, making the stock more appealing to a wider audience.