What Is a Stock Split?
If you follow the financial news, chances are you may have heard of companies such as Apple or Tesla splitting their stock. But what does this mean? What is a stock split? And why do stock splits happen?
In this article, we will explore these questions and demonstrate how stock splits work by looking at a recent stock split example.
Table of Contents
What Is a Stock Split?
A stock split occurs when a company increases the number of its shares and distributes the new shares to existing shareholders in proportion to their current holdings. Simultaneously, the price of each share is lowered by the same, predetermined, ratio.
Consequently, although the number of shares outstanding increases, the total market capitalisation of the company and the value of each shareholder’s stake do not change.
For example, let’s say you own 100 shares of a company’s stock and the company splits its stock by a ratio of 2-for-1. Post-split, you will own 200 shares of the company’s stock. However, your 200 shares would be worth the same as the 100 shares you owned pre-split.
Why Do Companies Split Stock?
So, if the value of the company does not change, what is the point in conducting a stock split? Although they may not appear immediately obvious, there are a number of reasons as to why stock splits happen.
Firstly, a company often chooses to split its stock when its share price becomes too high. For this reason, although a stock split in itself has no effect on the value of a company, it is often perceived as a bullish signal, as it indicates that share price has risen to a high level.
A company’s motivation for splitting the stock and, consequently, lowering the price per share can make the stock more attractive to a wider audience of investors who may have previously been deterred by the high cost. This can potentially increase demand for the company’s shares.
For example, in 2022, Amazon took the decision to conduct a 20-for-1 stock split. At the time the stock split was announced, shares were changing hands at around $2,800 each. For many retail investors, buying one share for $2,800 may not be feasible. However, when the stock split came into effect three months later, shares were trading at a more accessible level of around $120 each.
Furthermore, a higher number of shares outstanding typically results in a higher level of liquidity. The greater a stock’s liquidity, the easier and quicker it is to buy and sell. It also tends to result in narrower spreads.
Apple Stock Split Example
Since Apple went public in 1980, it has split its stock on five different occasions. The most recent Apple stock split took place on 28 August 2020.
On 30 July 2020, after the market had closed, Apple released their quarterly results and announced that its Board of Directors had approved a 4-for-1 stock split, which would take place after the market closed on 28 August.
The day before the Apple stock split took effect, the stock ended the session at just below $500 per share. The following trading day, 31 August 2020, Apple shares opened the session at their new split-adjusted price of $127.58 and shareholders received three additional shares for every one they had previously held.
The chart below shows the evolution of Apple’s share price in 2020, with the dates at which the Apple stock split was announced and, subsequently, took place highlighted.
As we can see, the market seems to have initially responded favourably to news of the split. However, it’s worth noting that Apple was already following an upwards trend and, shortly after the split actually took effect, the share price experienced a slight correction.
Final Thoughts
Stock splits tend to happen after a company has experienced a period of increasing share price and is often perceived by the market as a bullish signal.
Consequently, the announcement of a stock split can sometimes prompt a positive reaction from the market and result in a further increase in share price. However, this is far from always the case and, as we saw with the example of Apple above, any positive effect on share price may be short-lived.
It is important to remember that a stock split in and of itself does not affect the market capitalisation of a company and, consequently, it does not have an impact on individual investors’ stakes.
Investing with Admiral Markets
With an Invest.MT5 account from Admiral Markets, you can buy shares in more than 4,500 stocks and over 200 Exchange-Traded Funds (ETFs) from around the world. Click the banner below to find out more:
FAQ
Is a stock split a good thing?
A stock split itself does not affect a company’s value or change its fundamentals and, consequently, is neither good nor bad. However, the lower share price may attract new investors who had previously been deterred by the higher price, which could cause an increase in demand.
What is a 10 for 1 stock split?
In a 10-for-1 stock split, shareholders receive nine shares for every one previously held. For example, if you owned 100 shares in a company that decided to split its stock by a ratio of 10-for-1, you would own 1,000 shares post-split.
However, the price per share would be reduced by the same ratio, meaning that your 1,000 post-split shares would be worth the same as the 100 shares owned pre-split.
How many stock splits has Tesla had?
At the time of writing, Tesla has undergone two stock splits in its history. The most recent of these was a 3-for-1 split which took place in August 2022.
Other Articles You May Find Interesting:
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
