Understanding Stock Splits
Learn about stock splits, their impact on your investments, and why companies choose to split their stock.
What Is a Stock Split?
A stock split is a corporate action in which a company divides its existing shares into multiple shares. While the number of shares outstanding increases, the total dollar value of the shares remains the same because the split does not add any real value.
For example, in a 2-for-1 stock split, each shareholder receives an additional share for each share held, but the value of each share is reduced by half. If you owned 100 shares of a company trading at $50 per share (total value: $5,000) before a 2-for-1 split, you would own 200 shares at $25 per share (still a total value of $5,000) after the split.
Common Split Ratios
Two shares for every one share
Three shares for every one share
Four shares for every one share
Why Do Companies Split Their Stock?
Increased Liquidity
By lowering the share price, stock splits can make shares more accessible to a broader range of investors, potentially increasing trading volume and liquidity.
Psychological Appeal
Lower-priced shares may appear more affordable to retail investors, potentially attracting new investors who might have been deterred by a high share price.
Signal of Confidence
Stock splits are often interpreted as a signal that management is confident about the company's future growth prospects.
Index Inclusion
Some companies split their stock to increase their chances of being included in major stock indices, which often have minimum requirements for share liquidity.
Notable Stock Split Examples
Apple (AAPL)
Apple has a history of stock splits, with its most recent 4-for-1 split occurring on August 28, 2020. Prior to this, Apple had split its stock on three other occasions: a 7-for-1 split in 2014, and 2-for-1 splits in 2005 and 2000.
After its 2020 split, Apple's share price dropped from around $500 to $125, making it more accessible to retail investors while maintaining its position as one of the world's most valuable companies.
Nvidia (NVDA)
Nvidia implemented a 4-for-1 stock split on July 20, 2021. Before the split, Nvidia's shares were trading at around $750. After the split, the price was adjusted to approximately $187.50.
This split came during a period of significant growth for Nvidia, driven by strong demand for its graphics processing units (GPUs) in gaming, data centers, and artificial intelligence applications.
Tesla (TSLA)
Tesla executed a 5-for-1 stock split on August 31, 2020. At the time, Tesla's shares were trading at over $2,000, and the split brought the price down to approximately $400.
The split followed a period of extraordinary growth in Tesla's stock price, which had risen by more than 500% in the 12 months leading up to the split announcement.
Frequently Asked Questions
Does a stock split affect my investment's value?
No, a stock split does not change the fundamental value of your investment. While you'll own more shares, each share will be worth proportionally less, keeping your total investment value the same immediately after the split.
How do stock splits affect my cost basis?
Your cost basis per share is adjusted proportionally with the split ratio. For example, if your original cost basis was $100 per share and there's a 2-for-1 split, your new cost basis would be $50 per share.
Are there tax implications from a stock split?
Generally, stock splits are not taxable events in the United States. Your total cost basis remains the same, just spread across more shares. However, always consult with a tax professional for advice specific to your situation.
What's a reverse stock split?
A reverse stock split is the opposite of a regular (forward) split. It reduces the number of outstanding shares and increases the share price proportionally. Companies might do this to increase their share price, perhaps to meet minimum price requirements for continued listing on an exchange.