What Are Stock Splits?

The term “stock split” may be one of those financial terms that you’ve seen but never understood, but stock splits are quite simple, and understanding them can be valuable for any investor. Let's explore what stock splits are and why they matter for investors.

What Is a Stock Split?

A stock split is exactly what it sounds like: a company splits its existing shares into multiple new shares.¹ The company's total value remains the same, but the number of shares increases, and the price per share decreases proportionally.

Imagine owning one share of a company priced at $100 per share. If that company decides to do a 2-for-1 stock split, you would then own 2 shares, each priced at $50. The value of your investment remains the same: 1 share × $100 = 2 shares × $50.

Why Do Companies Split Their Stock?

There are a few reasons why companies may decide to split their stock. Here are a few:

Liquidity
A lower stock price can make shares more accessible to a broader range of investors. Some investors may be more inclined to buy company shares at $50 rather than $100.

Psychological impact
Psychologically, a lower stock price can make shares seem more affordable and attractive to retail investors.

Increased Trading Activity
With more shares available, trading volume often increases. This heightened activity can sometimes lead to increased liquidity and volatility, which can be appealing to both the company and investors.

Types of Stock Splits

There are a few different types of stock splits, including the following:²

2-for-1 Split
A 2-for-1 stock split is the most common type, in which each share is split into 2 shares. For example, if you had 100 shares before the split, you would have 200 shares after.

3-for-1 Split
With a 3-for-1 split, each share becomes 3 shares. If you had 100 shares, you'd end up with 300 shares.

Reverse Split
A reverse stock split is the opposite, in which multiple shares are combined into one. Struggling companies may do this to increase their stock price, as it can make the shares seem more valuable.

What to Know about Stock Splits as an Investor

For investors, the impact of a stock split is primarily psychological and technical. Here’s what to know:

A stock split does not change the total value of your holdings. If you owned $10,000 worth of shares before a 2-for-1 split, you still own $10,000 worth of shares after.
Stock splits sometimes result in increased liquidity, which can be beneficial for those looking to buy or sell shares.
If you're trading options on a stock that undergoes a split, the terms of your options will likely be adjusted to reflect the new share count and price.

Real-World Examples of Stock Splits

Many well-known companies have executed stock splits over the years:

Apple: In 2020, Apple executed a 4-for-1 split, making shares more affordable for individual investors.³
Tesla: Tesla has also split its stock multiple times, including a 5-for-1 split in 2020.⁴
Google (Alphabet): In 2014, Google executed a 2-for-1 split.⁵

Stock splits are common in the financial markets, yet they can confuse investors who don’t know how they work. Understanding that a stock split is primarily a cosmetic change, increasing the number of shares while decreasing the price per share is key. For investors, the value of their holdings remains the same, but the potential for increased liquidity and accessibility can be appealing.

This content is developed from sources believed to be providing accurate information, and provided by Future Financial Wealth Management Group. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.