Table of Contents
While a soaring stock price usually signals growth and investor confidence, a steep price tag can also discourage smaller investors. When a stock feels “too expensive,” many retail traders simply look elsewhere for more affordable options.
To address this, companies may use a stock split. By increasing the number of shares and lowering the price per share proportionally, the company makes its stock more accessible without changing its actual market value. This move can improve both marketability and liquidity, allowing a wider range of investors to participate.
Learn more about a stock split and how it works.
Key Points
• A stock split is a corporate action that divides existing shares into multiple new shares, proportionally lowering the price per share.
• Companies use stock splits primarily to make their stock price more accessible to a wider range of individual investors.
• A reverse stock split is the opposite, consolidating existing shares into fewer, higher-priced units, often used when a stock price has dropped too low.
• Stock splits are not considered taxable events; taxes only apply when the shares are sold, requiring an adjustment to the per-share cost basis.
• While the number of shares an investor owns increases after a split, the total dollar value of their investment and their percentage of company ownership remain exactly the same.
What Is a Stock Split?
Simply defined, a stock split is a corporate action where a company divides its existing shares into multiple new shares. While the number of shares increases, the company’s total market value — and the value of your investment — remains exactly the same. A common analogy is to think of it like cutting a pizza into smaller slices; you have more pieces, but the same amount of food.
An often-used ratio is a 2-for-1 split. If you owned one share priced at $100, you would suddenly own two shares priced at $50 each. Companies typically do this to make their stock more affordable for individual investors and to increase trading activity, also known as liquidity. It’s generally seen as a sign of corporate health and management confidence.
What Is a Reverse Stock Split?
A reverse stock split is the opposite of a standard stock split. Instead of creating more shares, a company consolidates its existing shares into fewer, higher-priced units. Each outstanding share is swapped for a specific fraction of a share — for example, two shares might become one.
Companies may use this strategy when their stock price has dropped too low. By reducing the total number of shares, the price per share automatically increases, even though the company’s overall market value remains the same.
For example: In late July 2021, General Electric (GE) executed a 1-for-8 reverse split. Before the split, the stock was trading at roughly $13 per share. By replacing every eight shares an investor owned with a single share, the stock price immediately jumped to over $100. While investors held fewer shares than before, the total value of their investment remained unchanged.
How Does a Stock Split Work?
When a company initiates a stock split, it increases its share count while proportionally lowering the price per share. The process begins when the board of directors approves a specific ratio, such as 2 for 1 or 3 for 1. On a predetermined date, your brokerage account automatically updates to reflect the new balance.
If you own one share of a $100 stock and it splits 2 for 1, you will then own two shares priced at $50 each. While the company’s total shares outstanding increase, its market capitalization — the company’s total value — remains the same. Your total investment value also stays exactly the same; it is simply distributed across more units.
Ultimately, a split makes the stock more accessible to a broader range of investors without changing the company’s underlying value.
Recommended: Stock Market Basics for Beginners
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
Types of Stock Splits
Companies use different ratios to split their stock. In a forward stock split, the first number in the ratio is larger (such as 2 for 1), meaning the number of outstanding shares will increase. While the share price drops proportionally, the company’s total market value stays the same.
Here are some of the most common stock split ratios:
2 for 1 (2:1)
A 2-for-1 stock split doubles the total number of shares an investor owns. To account for this increase, the share price is cut exactly in half when the stock exchange opens on the effective date.
3 for 1 (3:1)
In a 3-for-1 split, a company issues two additional shares for every single share already held by an investor. This results in a tripled share count and a price adjustment where each new share is worth exactly one-third of its pre-split value.
3 for 2 (3:2)
The 3-for-2 split is a slightly more complex ratio where one new share is issued for every two shares currently outstanding. This results in a 50% increase in the total number of shares. At the same time, the split reduces the price per share by one-third.
5 for 1 (5:1)
In a 5-for-1 stock split, a company multiplies its total number of shares by five. This process simultaneously divides the price of each individual share by five to ensure the total market value of the company remains unchanged.
Why Do Companies Conduct Stock Splits?
Companies may split their shares when the price becomes too high for the average investor to afford. While the company’s overall value remains unchanged, splitting reduces the cost per share, making it more accessible to retail investors. For instance, an investor may be more likely to buy shares at $20 than at $100. This lower entry point may attract more buyers, which increases the stock’s liquidity.
A company may also split a stock as a signal of confidence. A split is often seen as a sign that management feels secure about future growth and expects the price to continue to rise. In addition, splits can increase a stock’s visibility, often attracting media attention and new analyst coverage that can further drive investor interest.
Pros and Cons of Stock Splits
There are several potential benefits of stock splits, but there are some possible disadvantages of the practice as well.
Pros
Some potential advantages of stock splits include:
• Improved accessibility: Lowering a high share price makes the stock more affordable for smaller retail investors who might otherwise be priced out. This can result in more investors purchasing the stock.
• Greater liquidity: Increasing the number of outstanding shares makes it easier to buy and sell quickly, giving investors readier access to their cash. Liquidity is typically an important consideration when building a portfolio.
• Possible price momentum: While stock splits do not change the value of a company, they may spur investor interest that can potentially drive up the share price after the split occurs.
Cons
Stock splits can also have drawbacks, such as:
• Cost and complexity: Executing a split requires legal oversight and regulatory compliance, which can be expensive and time-consuming for the company.
• Increased volatility: The lower share price may trigger a surge in trading volume and speculative interest, which can potentially lead to higher short-term price volatility.
• Reduced relevance: The ability to buy fractional shares today can make stock splits less impactful and necessary than they were in the past.
Real-World Examples of Stock Splits
Here are some notable stock splits from the last couple of decades:
• 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 $126.
• Netflix (NFLX): The entertainment company announced a 7-to-1 stock split in July 2015. Before the split, the stock was trading at around $700 per share. After the split, the stock traded at about $100.
• 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 $125 per share. After the split the stock traded at about $62-$63 per share.
• 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 announced 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?
When a company announces a stock split, the total value of your investment remains the same. For example, if you own $1,000 worth of stock before the split, you will still own $1,000 worth of stock afterward.
Your broker will automatically add the additional shares to your account at the new, lower price. Unlike a new stock issuance, a split does not dilute your ownership; you continue to own the exact same percentage of the company as you did before.
How Do Stock Splits Affect Taxes?
Stock splits are not taxable events and do not need to be reported on your tax return, since they do not change your total ownership value, only the number of shares. You only owe taxes when you sell the shares. However, it’s important to adjust your per-share cost basis after a stock split to accurately calculate capital gains or losses if/when you do sell.
For example, if you bought 100 shares of a company at $15 each, your total investment is $1,500. After a 2-for-1 split, you would own 200 shares. Your total cost basis remains $1,500, but it is now spread across more shares, reducing your per-share basis to $7.50 ($1,500 ÷ 200). While you own more individual pieces, your total equity remains unchanged.
The Takeaway
A stock split occurs when a company increases its number of outstanding shares and reduces the price per share proportionally. It does not change the fundamental value of the company or the total value of your investment.
Companies often use stock splits to make their shares more accessible to a wider range of investors, improving marketability and liquidity. While generally viewed as a positive sign of management confidence, the true impact on your portfolio only occurs when you decide to sell, which is the time when you’ll need to use your adjusted cost basis to calculate capital gains or losses for tax purposes.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.
FAQ
Does a stock split increase my investment value?
No, a stock split does not increase your investment value. The company’s total market capitalization and the value of your shares remain the same; they are simply distributed across more shares at a lower price per share. A $100 share split 2 for 1 becomes two $50 shares — the total value is still $100. The change is purely cosmetic and often designed to make the stock more accessible to smaller investors.
Should I buy a stock before or after a split?
Generally, the decision to buy a stock before or after a split should be based on your long-term conviction in the company, not the split itself. A stock split is a mechanical event that does not change the company’s fundamentals or your investment’s total value. Since the price per share is lower after the split, it may make the stock more accessible if you plan to buy whole shares. It’s generally wise to focus on the company’s outlook, earnings, and valuation, not the split’s timing.
How do fractional shares work in a stock split?
When a company executes a stock split, your existing fractional shares are multiplied by the split ratio, just like whole shares. For instance, if you own 1.5 shares and the company announces a 2-for-1 split, your position will automatically update to 3 whole shares. Since the share price is proportionally reduced, the total dollar value of your investment remains unchanged. Fractional shares ensure that investors who own less than a whole share still participate fully in the corporate action.
Do stock splits affect dividend payouts?
Yes, stock splits do affect dividend payouts. If a company pays a dividend, a stock split will proportionally increase the number of shares you own while reducing the dividend paid per share. For example, in a 2-for-1 split, you would receive twice as many shares, but the dividend per share would be halved. The total dividend income you receive remains the same as before the split, assuming the company maintains its total payout commitment.
Are stock splits a good or bad sign for investors?
Stock splits are generally viewed as a positive sign, indicating that a company’s stock price has risen significantly and management is confident in future growth. While a split itself doesn’t change the company’s value or your investment, the increased accessibility and liquidity can draw in more investors. However, they are a mechanical action, and a purchase decision should ultimately be based on the company’s fundamental strength and outlook.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
SOIN-Q226-025