A skyrocketing share price is usually a good thing for a company; investors expect the company to continue growing in the future. However, a stock trading with a hefty price tag may frighten away smaller investors, who may perceive the stock as too rich for their blood. That means that many investors might pass over the company’s stock for those with a lower per share price tag.
To combat this, a company will often conduct a stock split. This action brings down the price of the company’s stock so that shares look more attractive to more investors, even though the company’s value remains the same. The investors can invest, and the company gets more marketability and liquidity on the stock market.
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What Is a Stock Split?
A stock split is when a company increases the number of its outstanding shares on the stock market, but its market capitalization (sometimes shortened as market cap) stays the same.
For example, if an investor owns ten shares of a company with a stock price of $100 and the company announces a 5-to-1 stock split, the investor will then own 50 shares of the stock trading at $20 per share after the stock split. Despite the split, the shareholder still owns $1,000 worth of stock.
A stock split may also be referred to as a one-time stock dividend, as the company is giving out additional shares to stockholders.
What Is a Reverse Stock Split?
In a reverse stock split, a company swaps each outstanding share of the company’s stock for a fraction of a share. A company often conducts a reverse stock split when the share price is low and the company looks to increase the share price.
In late July 2021, General Electric (GE) completed a 1-for-8 reverse split of its shares to boost the stock’s share price. The reverse split increased its share price from less than $13 pre-split to more than $100 post-split; the company replaced every eight shares held by an investor with one share.
Why Do Companies Conduct Stock Splits?
Companies will often split their stock when the share price gets too high. By splitting the stock, a company lowers its share price and makes it more affordable to retail investors, even though the company’s value stays the same.
For example, retail investors may be more likely to buy a chunk of shares of a stock trading at $20 rather than shares trading at $1,000 or more. This move to reduce the individual share price helps increase the stock’s liquidity in the market.
Examples of Stock Splits
• Apple (AAPL): The computer giant split its stock by a 4-to-1 ratio in August 2020. Prior to the split, the stock was trading at around $500. After the split, the stock traded at about $124.
• Netflix (NFLX): The entertainment company announced a 7-to-1 stock split in July 2015. Before the split, the stock was trading at nearly $800 per share. After the split, the stock traded at about $114.
• Nike (NKE): The sports apparel company split its stock by a 2-to-1 ratio in December 2015. Prior to the split, the stock was trading at around $128 per share. After the split the stock traded at about $64 per share.
• Nvidia (NVDA): The technology company engaged in a 4-to-1 stock split in July 2021. Before the split, Apple’s stock was trading at around $750, and after the split, the shares were priced near $187.
• Tesla (TSLA): The electric car manufacturer split its stock by a 5-to-1 ratio in August 2020. Before the split, the stock was trading at around $2,200. After the split, the stock traded at around $440. Tesla’s shares rallied during the next two years, so the company declared a 3-to-1 stock split in August 2022, bringing the stock price down to around $300 from nearly $900 per share.
What Happens When a Stock You Own Splits?
If an investor owns stock in a company that announces a split, it will not materially affect the investment. As mentioned above, if an investor owns $1,000 worth of stock and a company splits its stock, an investor will still own $1,000 worth of stock after the split.
The additional shares at the lower share price will be automatically added to an investor’s account by the broker.
A stock split does not dilute the ownership of existing shareholders like a new stock issue may do. After a stock split, an investor still owns the same percentage of the company.
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Can a Stock Price Rise After a Stock Split?
Companies that undergo a stock split often do so because their stock price is rising, signaling investor confidence in the company. So, the announcement of a stock split is an indication that the company is doing well. Investors may want to put money into the company, pushing the share price up even before the stock split.
Following the stock split, the stock’s share price may go up because the lower price makes it more affordable to smaller retail investors that may not be able to purchase shares at a $1,000 price. There becomes an increased demand for the lower share price.
The Takeaway
When a company announces a stock split, it can be tempting for investors to pour money into the stock because it will be more affordable on a per share basis. However, investors should be wary of making rash decisions because a stock may look more affordable and attractive. After all, the value of the company is still the same. Investors want to make financial decisions that line up with long-term wealth-building goals, regardless of a stock’s price tag.
And investors don’t necessarily have to wait for a company to split its stock to afford an investment. With SoFi Invest®, investors can take advantage of buying fractional shares, making it possible to own part of a company’s stock without committing to a whole share.
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