Splitting Stocks

Investors get more shares for their money with a stock split

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Amazon. Shopify. Tesla. What do these companies have in common? They all underwent stock splits in 2022.¹

When well-known companies split stock, it tends to garner a lot of attention. However, even lower-profile stock splits can benefit both current and potential investors. But what exactly is a stock split, and how do they work?

More Shares, Same Value

If a company splits their stock, it’s usually because their share price has risen substantially. To make their stock more attractive to potential investors, the issuing company divides outstanding shares while keeping the total value of the outstanding shares the same. This reduces each share’s price, providing more liquidity for the company while retaining the company’s overall value.

Companies can choose to split stocks by whatever ratio they choose. For example, Amazon split its stock at a 20-for-1 ratio in 2022. Every outstanding share was divided into 20 pieces, while the total value of the stock remained the same. Shopify investors received a 10-for-1 split.

The most common stock splits, however, are 2-for-1 or 3-for-1. For example, if you own one share worth $24, in a two-for-one split you would now own two shares, each worth $12. You would own three shares worth $8 with a three-for-one split.

The Pros and Cons of a Stock Split

Stock splits benefit both current and potential investors. Current investors tend to like stock splits because they immediately increase the number of shares they own. And for potential investors, the company’s stock becomes more affordable. A split can increase companies’ liquidity since the lower price makes it easier for investors to buy and sell their shares.

However, stock splits have drawbacks, mostly for the issuing company. A stock split can be expensive and must conform to regulatory laws and rules. And since a split doesn’t impact the company’s market value, it can be a lot of work for little benefit to the stock issuer.

Companies must also guard against dropping share prices too low. The Nasdaq, for example, issues compliance warnings to companies whose stocks drop below $1 for 30 consecutive days.² If a company trades on the Nasdaq, it must avoid issuing stock splits that could take share prices below $1.

Still, many companies find a stock split beneficial in the long run. Many often see their stock prices increase following a split. Apple, for example, split its shares in August 2020. Before the split, shares were trading at $540. A 4-for-1 split took share prices to $135.³ As of late mid-September 2023, Apple’s stock was trading at $175 per share.⁴

What to Know Before You Buy

Should you consider investing in companies that have announced an upcoming stock split? It depends on several factors. It’s always best practice to consult your financial advisor before buying or selling shares. They can assist you with crafting a portfolio aligned with your specific long-term goals.

SOURCES

¹ Adam Levy. The Motley Fool. July 17, 2023. “Upcoming Stock Splits 2023.” https://www.fool.com/investing/how-to-invest/stocks/calendar/. Accessed Sept. 12, 2023.

² Cory Janssen. Investopedia. Aug. 25, 2023. “How To Avoid Getting Delisted From Nasdaq.” https://www.investopedia.com/investing/the-dirt-on-delisted-stocks/. Accessed Sept. 12, 2023.

³ Adam Hayes. Investopedia. April 24, 2023. “What a Stock Split Is and How It Works, With an Example.” https://www.investopedia.com/terms/s/stocksplit.asp. Accessed Sept. 12, 2023.

⁴ Yahoo! Finance. “Apple Inc. (AAPL).” https://finance.yahoo.com/quote/AAPL?p=AAPL&.tsrc=fin-srch. Accessed Sept. 12, 2023.

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