What a stock split is
A stock split gives shareholders more shares at a lower price, while the total value stays the same. Here is how splits and reverse splits work.
A stock split is when a company divides each of its existing shares into more shares. The price of each share falls by the same proportion. The total value of what you own does not change.
A simple example
Say you own 10 shares of a company. Each one trades at $300, so your holding is worth $3,000.
The company announces a 3-for-1 split. After the split, you own 30 shares. Each one trades at about $100. Your holding is still worth about $3,000.
You have more shares, but each one is a smaller piece of the company. Nothing about the business itself has changed.
How splits are written
Splits are shown as a ratio.
- 2-for-1. Each share becomes two. The price roughly halves.
- 3-for-1. Each share becomes three. The price falls to about one third.
- 10-for-1. Each share becomes ten. The price falls to about one tenth.
The first number is how many shares you will have for every share you held before.
What does not change
A split changes the number of shares and the price per share. It does not change:
- The company's market cap. That is the share price times the number of shares, so the two changes cancel out.
- Your share of the company. If you owned 0.01% before, you own 0.01% after.
- The company's profit, cash or debt.
Per-share figures are adjusted too. Earnings per share and the dividend per share are divided by the same ratio. If a company paid $1.20 per share before a 2-for-1 split, it would usually pay $0.60 per share after. Your total dividend stays the same.
Why companies split their shares
Companies usually give a few reasons.
A lower share price. Some investors find a $50 share easier to buy than a $1,000 share. This mattered more in the past, when many brokers required people to buy whole shares. Today, many brokers let you buy fractional shares, which are parts of a single share. That has made this reason less important.
More trading. A lower price can bring in more buyers and sellers. More trading can make it easier to buy or sell shares quickly at a fair price.
Index rules. Some indexes, such as the Dow Jones Industrial Average, are weighted by share price. A very high share price can affect whether a company fits in such an index.
Do splits make a stock go up?
A split does not create value by itself. The company is worth the same amount the day after a split as the day before, apart from normal market moves.
Splits are often announced when a share price has already risen a lot. That is why they can be linked with good news in people's minds. But the split is a result of the past rise, not a cause of future gains.
Reverse stock splits
A reverse split works the other way. The company combines several shares into one, and the price per share goes up by the same proportion.
In a 1-for-10 reverse split, every 10 shares become 1 share. If the price was $0.80 before, it would be about $8 after. Your total holding stays about the same.
Companies often use reverse splits when their share price has fallen very low. Exchanges in both the US and Canada have rules about minimum prices or listing standards, and a reverse split can help a company keep its listing. A reverse split does not fix the reasons the price fell.
The key dates
- Announcement date. The company says a split is coming and gives the ratio.
- Record date. The date that decides which shareholders get the extra shares.
- Effective date. The date the shares start trading at the new, split-adjusted price.
You do not need to do anything. Your broker updates your account automatically.
What about leftover fractions?
Sometimes a split, especially a reverse split, would leave you with part of a share. Companies and brokers usually handle this by paying you cash for the fraction. The exact method depends on the company and the broker.
Taxes
In most cases, a regular stock split is not a taxable event in either the US or Canada. Your total cost stays the same, but it is spread across more shares. Cash paid for fractional shares may be treated differently. Rules depend on your country and account type.
The short version
- A stock split gives you more shares at a lower price per share.
- The total value of your holding and the size of the company stay the same.
- A reverse split combines shares into fewer, higher-priced shares.
- A split does not make a company more valuable by itself.
- Your broker handles the change automatically.
This is general information, not investment advice.
Updated