Aug 31, 2020
What’s a Stock Split?
It can make a stock more affordable for investors to purchase.
When a company decides to split its stock, it’s literally doing just that—breaking stocks into additional shares. By splitting its stock, a company attempts to decrease the dollar price per share of its stock by increasing the amount of shares out in the market.
Companies often conduct a stock split (sometimes referred to as a forward stock split) in order to make the stock more affordable for investors to purchase. Apple’s stock (AAPL), for example, has split four times since the company went public in 1980, most recently with a 4-for-1 split scheduled for August 31, 2020.
Example of a stock split
Stock splits always have something called a split factor associated with them, which is represented as the ratio X:1 or X for 1. That means for every one share you own, you will receive number X number of shares, which can be whatever number the company determines.
Let’s take a look at an imaginary example for ABC company, whose current share price is $400.*
ABC plans a 4:1 (4 to 1) split, effective January 2 of a given year. That means an investor with 1 share of ABC worth $400 would then own 4 shares worth $100 each. Note: The total value of the 4 shares is still $400.
Here are the changes the investor would see to their portfolio:
|Date||Initial Investment||ABC Shares||Price Per Share|
The investor now owns 4 shares of ABC stock, but with an adjusted price per share of $100. These 4 shares cost the same amount to the investor as when they originally purchased the stock, $400 in our example.
Special note: Most Stashers own fractional shares. In the case of a stock split, the value of your shares would be divided by the same split factor. Let’s say you own 1.1 shares of ABC, worth $440 (1.1×400=440.) After the stock split, you’d own 4.4 shares at $100 per share, but the value of your investment is still the same $440 (4.4X100=440.)
The most important thing to remember is that while the price per share will change as a result of a stock split, it will have no impact on the market value of the company, or your investment.
The market value, or market cap, of a company is determined by multiplying the price per share by the number of shares outstanding. It represents the total value of its equity in the market.
When a company goes through a stock split, the number of shares increases and the price per share decreases by a proportional amount, leaving the market value the same.
*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy
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