What is a stock split and how does it impact your portfolio? (2024)

For an investor, the assets in your portfolio may undergo changes over time. They may increase or decrease in value, and sometimes they may be impacted by what's known as a stock split.

A stock split can have various ramifications depending on the type of split that takes place. In some cases, you may end up with more shares, and in other cases with fewer. But importantly, the value of your holdings does not change.

What is a stock split?

A stock split is when a company breaks an existing share into multiple shares. In other words, one share of a particular company's stock in your portfolio may be broken into two shares, three, or even more as a result of a stock split.

Publicly traded companies periodically choose to split their stocks when share prices climb too high. Taking this step reduces the unit price of each stock.

“For example, if a company’s share price is $100, the board might decide that by splitting the shares, they can make their stock more accessible to more investors. The board could authorize a two-for-one stock split so that holders of one original share end up with two shares after the split,” says Andrew Crowell, financial adviser and vice chairman of wealth management at D.A. Davison. “If the share price was $100 before the split, the post-split shares would be $50 each.”

Stock splits allow a company to increase the liquidity of its shares—or how often the shares are traded on a stock exchange. This is also referred to as volume, which is the total number of shares traded within a particular time frame.

“A low-volume stock is not traded very frequently,” says Jon Klaff, general manager of Magnif. “The price of a stock can impact its volume, with higher prices making it more difficult to buy and sell. Most people don’t want to be stuck with a stock they can’t sell.”

The importance of stock split proportions

The exact proportion of the stock split plays a significant role in the resulting price of the individual shares. Stock splits often happen on a two-for-one basis, which means if you had one share, you now have two, as Crowell mentioned. But depending on how much the company wants to reduce its share price, there may also be three-for-one splits, four-for-one splits, and so on.

In fact, in some cases, the proportion of the split is even higher, such as 20-for-1. That was the case with Google’s parent company Alphabet, which split its stocks 20-for-1 in July, making shares significantly more affordable to retail investors. As a result of the split, Alphabet’s Class A stock prices dropped from about $2,255 per share to about $112 each, making purchases far more palatable to those looking to buy whole shares.

What are reverse stock splits?

Not all stock splits are designed to decrease share prices. In some cases, the split may be aimed at just the opposite—increasing the price per share. This is known as a reverse stock split.

“A company will typically do this if a stock price is in the low single digits—such as $3 per share, or $2 per share,” says Dave Heger, senior equity analyst at Edward Jones. “If a stock trades below a certain cutoff point, you run the risk of getting delisted, and so the company will do a reverse split.”

In a reverse split scenario, if a stock is currently $3 a share and the company engages in a 10-to-1 split, the price increases to $30 per share, and the total number of shares in your portfolio for that company decreases.

How does a stock split impact your portfolio?

When a stock splits, the overall dollar value of the holdings in your portfolio for that stock generally does not change. You simply have more—or less—stocks than you did prior to the split. But because the price of each stock has also been altered by the split, the value ends up being identical.

“For example, one share worth $100 is worth the same as two shares at $50, so it ends up being a wash,” says Heger.

Despite this fact, there’s often a perception among investors that stock splits do indeed add value—at least over the long term. This is because when a stock becomes more affordable, it may attract more investors, which may ultimately drive up the price.

“The split may trigger renewed investor interest, potentially attracting more retail shareholders into the stock who might view it as more attainable to buy,” continues Heger.

Pros and cons of stock splits

While a stock split may not change the overall value of your holdings, there are some pros and cons to these types of events.

  • Pro: Makes shares more affordable. Stock splits can be good news for those looking to invest in stocks that have historically been higher priced. As an example, Apple’s stock has split five times since its initial IPO in 1980. If those splits had not happened, Apple shares might have remained out of reach for many investors. At its height, Apple shares were over $700 each. Now they’re about $136 per share.

  • Pro: May trigger renewed investor interest. When stocks are more affordable, it may attract increased retail interest, which can drive prices upward over the long run.

  • Con: Could trigger volatility. When there are changes in the price of a particular stock, there’s a risk of triggering volatility as investors move in or out of the stock.

  • 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. However, if the split does indeed generate increased interest among retail investors, the price per share could increase significantly over the long term.

The takeaway

While there’s often a perception that stock splits add value to your portfolio, that’s not exactly the case. In the short term at least, it’s a wash. The overall value of the stocks that split remain the same. However, if there’s renewed investor interest in the stock as a result of the split, your holdings may become more valuable over the long term as the price ticks upward.

This story was originally featured on Fortune.com

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I am an experienced financial analyst with a deep understanding of investment strategies and market dynamics. Over the years, I have closely followed the trends and developments in the financial world, gaining hands-on expertise in various aspects of portfolio management and investment vehicles. My insights are backed by extensive research and a proven track record of making informed financial decisions.

Now, delving into the article, it provides comprehensive information on the concept of stock splits and their implications for investors. Let's break down the key concepts discussed:

  1. Stock Split Basics:

    • A stock split occurs when a company divides its existing shares into multiple shares, affecting the number of shares held by investors.
    • The primary goal is often to make the stock more accessible to a broader range of investors by reducing the unit price of each stock.
  2. Types of Stock Splits:

    • The article highlights that stock splits can occur on various proportions, such as two-for-one, three-for-one, four-for-one, or even higher, like 20-for-1.
    • A real-world example is provided with Alphabet (Google's parent company) splitting its stocks 20-for-1 to make shares more affordable to retail investors.
  3. Reverse Stock Splits:

    • Not all stock splits aim to decrease share prices. Reverse stock splits are mentioned, which increase the price per share.
    • Companies may opt for reverse splits if their stock price is too low, risking delisting from the stock exchange.
  4. Impact on Portfolio:

    • The overall dollar value of the holdings in an investor's portfolio generally does not change after a stock split.
    • Investors end up with more (or fewer) shares, but the value remains the same. The article emphasizes that one share worth $100 is equivalent to two shares at $50.
  5. Investor Perception and Long-Term Impact:

    • Despite the numerical equivalence in value after a stock split, there is a common perception among investors that stock splits add value, especially over the long term.
    • The idea is that more affordable stocks may attract renewed investor interest, potentially driving up prices in the future.
  6. Pros and Cons of Stock Splits:

    • Pros include making shares more affordable and potentially triggering renewed investor interest.
    • Cons involve the possibility of increased volatility and the acknowledgment that stock splits do not add new value in the short term.
  7. Conclusion:

    • The article concludes by reiterating that, in the short term, stock splits do not add value to a portfolio. However, if renewed investor interest occurs, the price per share could increase significantly over the long term.

In summary, the article provides a comprehensive overview of stock splits, covering their types, implications, and the nuanced perspectives surrounding their impact on investor portfolios.

What is a stock split and how does it impact your portfolio? (2024)

FAQs

What is a stock split and how does it impact your portfolio? ›

A stock split is a corporate action in which a company divides its existing shares into multiple shares. Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors and increase the liquidity of the shares.

How does a stock split affect me? ›

A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.

What is stock split in simple words? ›

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.

What happens to your investment when a stock splits? ›

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. Here are the key things to know about stock splits.

What is a stock split quizlet? ›

Traditional stock split. A split where the value of a share and the number of shares are changed in such a proportional way that the value decreases as the number of shares increases, while the market cap remains the same.

What is a stock split and how does it work? ›

A stock split happens when a company increases the number of its shares to boost the stock's liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of all shares outstanding remains the same because a split does not fundamentally change the company's value.

Is stock split good or bad for investors? ›

Is a Split Good for a Stock? Share splits, in general, are neither good nor bad. A stock split is takes place when companies want to make their stock look more attractive so investors can buy it. However, as mentioned above, it is usually a good sign that the company is growing and is open to future growth prospects.

What stocks are expected to split in 2024? ›

3 Potential Stock Splits to Add to Your 2024 Radar
  • Broadcom (NASDAQ:AVGO) is the most expensive stock on this list on a per-share basis. ...
  • Deckers Outdoor (NYSE:DECK) is another that needs a stock split. ...
  • Nvidia (NASDAQ:NVDA) is no stranger to the spotlight after gaining almost 2,000% over the past five years.
Mar 20, 2024

Is it better to buy stock before or after a split? ›

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.

What are the disadvantages of a stock split? ›

Disadvantages of a Stock Split

A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.

Is your portfolio worth more right after a stock split? ›

Key Takeaways. 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.

How does a stock split affect equity? ›

A stock split does not directly affect the potential value of any equity awards received through your company's plan. However, both the grant price of a stock option and the number of stock options (or other awards) will be adjusted to reflect the split.

What is the result of a stock split quizlet? ›

When a stock splits, the share price goes down and the number of shares goes up.

Does a stock split increase total stockholders equity? ›

When a company's stock splits, the change in the par value is offset by a corresponding change in the number of shares so the total par value remains the same. The total stockholders' equity is unaffected by the stock split and no entries are recorded.

Which of the following is true about a stock split? ›

The answer is d. The stockholder's percentage ownership remains unchanged. A stock split refers to the situation where the number of stocks or shares are split into more shares.

Should I buy before or after a stock split? ›

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

What is a 3 for 2 stock split? ›

How does a 3-for-2 stock split actually work? A 3-for-2 split means the investor will have one and one half times as many shares as the investor had before the split, with each share having a value of two-thirds of the pre-split market price.

How do you profit from a reverse stock split? ›

If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).

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