Stock Splits, Explained
This post covers the basics of stock splits, how they work and impact your investment portfolio, and much more. Without further ado, let's jump right in…
What is a stock split?
A stock split occurs when a company increases the number of its outstanding shares by issuing additional shares to current shareholders, thus lowering the price per share. Back in 2020, for example, Apple’s 4-for-1 stock split meant the company’s total outstanding shares increased from 12.6 billion to over 50 billion.
How does a stock split work?
Stock splits are commonly of the “2-for-1” or “3-for-1” variety. For example, if you as a shareholder own 10 shares of stock worth $100 (with a per-share price of $10) and the company decides to move forward with a 2-for-1 stock split, you’ll then have 20 shares owned of stock worth $100 (with a per-share price of $5) post-split.
Why do companies split their stocks?
Companies most commonly perform stock splits when looking to raise additional capital more easily, specifically wanting to…
Make shares more affordable
A company may choose to split its stock when stock prices are too high for the average investor and/or investors see little room for growth. A stock split makes the share price more enticing, boosting the chance additional people will invest in the company.
Stock splits can also attract new investors by lowering the price per share, making shares accessible to a broader audience. For example, Apple engaged in a 4-for-1 forward split back in 2020 when its stock was trading at nearly $500 a share: reducing the price to about $125 per share, attracting more investors. Two years later, Amazon initiated a 20-for-1 forward split when its stock was valued at almost $2,500 per share (resulting in a post-split price of $124). NVIDIA, meanwhile, completed a 10-for-1 forward split in 2024 to bring its stock price of $1,200 down to $120 per share.
See a short-term spike
Another benefit of stock splits is they can also boost share prices in the short term since lower prices theoretically increase demand. Per research highlighted on Smartasset.com, stock splits tend to be good for this with stocks significantly outperforming the S&P for the first 12 months post-split.
Increase liquidity
Another popular reason to pursue a stock split is to increase liquidity, as the lower price often leads to higher trading volumes. The bid-ask spread—the difference between the highest price a buyer will pay and the lowest price a seller will accept—narrows as a result of this and makes it easier to trade.
Why some companies don't perform stock splits
Not all companies split their stock. Here are some common reasons why:
For prestige
Some companies believe a higher stock price gives their company an air of esteem with perceptions of value outshining a lower price. One great example? Berkshire Hathaway, whose Class A shares have never split and are valued at nearly $500,000 per share—although the company does offer Class B shares (with fewer voting rights) as a reasonably priced alternative. In this way, the company's decision not to split can enhance the company's perceived value and reinforce its unique market image among investors.
To avoid risk
Stock splits do involve potential risk, especially if an unexpected financial event (e.g., a recession or other bad news for companies) immediately follows one. Why? Because this often drives down the price per share even more, perhaps spooking investors and/or—in worst-case scenarios—seeing the price tumble below listing requirements and thus plucking the company from the stock exchange, limiting its ability to raise capital.
What is a reverse stock split?
Companies can also do the opposite and replace existing shares with a proportionate number of smaller ones via a “reverse split.” A “1-for-2” reverse split, for example, replaces two existing shares with one new one—meaning if you owned 100 shares of stock, you’d now own 50 at the same overall value.
Why some companies perform reverse stock splits
Companies with low share prices often carry out reverse stock splits for various reasons in order to…
Avoid delisting
One key motivation for a reverse stock split is to prevent the risk of delistment from an exchange due to a failure to meet the minimum price requirement. In executing a reverse split, companies can increase their share price and maintain their listing status. For example, Allbirds (an apparel company) announced a 1-for-20 reverse stock split in September 2024 to get back in compliance with the Nasdaq minimum bid price requirement and thus avoid delisting.
Attract specific investors
Reverse stock splits can also help attract certain types of investors—particularly institutional investors—who may steer clear of low-priced stocks. A higher share price can make the stock more appealing to this group.
Change market perceptions
Conducting a reverse stock split can improve investor perceptions of a company and help ensure the stock remains within a typical trading range. Sirius XM Holdings Inc., for example, executed a 1-10 reverse stock split back in September 2024. Why? To lift its stock out of the penny-stock range and become more attractive to investors with the company set to spin off as an independent entity.
Reverse/forward stock splits
Although less common overall, a company looking to reduce the burden and administrative cost attached to communicating with investors may decide to eliminate smaller ones via a “reverse/forward split.” This involves two different stock splits: a reverse split conducted to reduce the overall number of shares (triggering cashouts among shareholders holding less than minimum requirements) followed by a split increasing the overall number of shares owned by each shareholder.
Key stock split dates
Three important dates are associated with stock splits, including:
Announcement date
The “announcement date” is when a company announces key split details including the ratio (e.g., 2-for-1 or 3-for-1).
Record date
Shareholders must own the stock on the record date to qualify to receive new shares created by the split.
Effective or distribution date
This is the date when the stock split takes effect, with new shares credited to investors' accounts.
Fractional investing and stock splits
Depending on the trading platform (e.g., Robinhood, Stash, or SoFi Invest), investors can now specify how much money they want to invest in a particular company rather than the number of shares they want to buy. If you want to buy a stock valued at $1,000 but only have $200 to spend, for example, you can buy one-fifth of a share (i.e., “fractional investing”). Fractional shares allow investors to own a portion of a share, making investing more accessible to a wider range of people.
What does a stock split mean for individual investors?
A stock split doesn’t change anything on a material basis for individual investors, who maintain their existing position with the same percentage of company ownership—owning more shares, each representing a smaller chunk. That said, it’s common for stock demand to rise post-split given more affordable shares; a bump in value may result, but there are no guarantees. When Tesla issued a 3-for-1 split in August 2022, for example, shares traded at $288 per share but were down almost 18% by the end of the next trading day.
The bottom line on stock splits
Any type of stock split has little, if any, impact on existing shareholders. These lower prices are sometimes very enticing to prospective investors, however.
Have questions about stock splits or investing? Schedule a free consultation with one of our CFP® professionals to get them answered.
FAQs
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While stock splits are neither inherently good nor bad, one primary advantage for investors is the resulting lower price can make shares more affordable and potentially boost demand: helping share value increase more quickly to magnify growth via additional shares owned post-split.
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Yes, mutual funds do split, but it’s not very common. Mutual fund investors can in fact benefit, however, when individual companies engage in stock splits if the fund they own also owns those same companies within its holdings.
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As mentioned previously, stocks have historically significantly outperformed the S&P 500 within the 12 months following a split (though there are no guarantees in this respect).
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Dividends per share are often adjusted after a split to maintain the total dividend payout to shareholders, ensuring the company's overall value and dividend payments are unaffected.
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You can do this on various websites including Yahoo! Finance and Investing.com, keeping in mind Vision Retirement isn’t affiliated with any of these sites.
About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.
Retirement Planning | Advice | Investment Management
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
There is no assurance that the techniques and strategies discussed herein are suitable for all investors or will yield positive outcomes. Investing involves risks, including possible loss of principal.
No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
