When a company is concerned that its share price is too high or too low, it can opt for a stock split or a reverse stock split. A stock split can help a company lower its share price to appeal to new investors, while a reverse stock split can boost its share price and help preserve its listing on a major stock exchange. Despite these changes, the total value of an investor’s holdings remains constant. The decrease in the price per share precisely offsets the increase in the number of shares. This principle extends to the company’s market capitalization, which remains unchanged before and after the split (except for market shifts). The total value of shares held by all shareholders should stay the same, maintaining the company’s market value.
- Many stock splits are greeted by investors as good news, and shares sometimes rise as a result.
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- A quick look at the example provided above shows that the total value of the investment won’t change.
- While Apple (AAPL) and Tesla (TSLA) have gotten a lot of publicity for their 2020 stock splits, their 5-for-1 or 4-for-1 stock splits were uncommon choices.
- Another way of saying this is that, on average, following a stock split announcement, the stock to be split tends to be overpriced relative to its fundamental value.
There are plenty of arguments over whether stock splits help or hurt investors. One side says a stock split is a good buying indicator, signaling that the company’s share price is increasing and doing well. This may be true but a stock split simply has no effect on the fundamental value of the stock and poses no real advantage to investors.
They will still own the same percentage of the company that they did before the split, and their position will be valued at the same dollar amount. Get the latest news on investing, money, and more with our free newsletter. If you had 100 shares of XYZ Corp. at $1,000 per share the day before the split, you now have 200 shares of XYZ Corp. at $500 per share. GameStop is a company in the midst of a turnaround, slowly shedding its brick-and-mortar past while leaning heavily into its digital future. During pandemic-related lockdowns, GameStop was a go-to for gamers who flocked to its website for many of their gaming needs, for gear and collectibles to games themselves. The company continues to venture further into the digital realm with the debut of its non-fungible token (NFT) wallet and its focus on blockchain gaming, which many see as the future of the industry.
More Stock Split Resources from MarketBeat
Sometimes, companies want to make their stock more affordable without lowering the collective value of their shares. They achieve this through stock splits — or, if they want to increase the price, reverse stock splits. Another reason companies consider stock splits is to increase a stock’s liquidity. With a lower price, more shareholders can afford to invest in high-value companies, ultimately increasing the market for that company’s stock. Stocks that trade above hundreds of dollars per share can result in large bid/ask spreads.
Why Do Companies Engage in Stock Splits?
While Apple (AAPL) and Tesla (TSLA) have gotten a lot of publicity for their 2020 stock splits, their 5-for-1 or 4-for-1 stock splits were uncommon choices. For example, LMNOP Corp. declares a stock split with a record date of March 1 and a distribution date of March 12. So, shareholders who own LMNOP Corp. stock on March 1 will get a letter or email dated March 12 telling them how many shares they now have. It is a purely cosmetic corporate undertaking that does not impact the value of the stock, either to the company or to shareholders — at least on paper. Some stocks work the same psychology in reverse — as the price rises, the stock’s allure grows, and the more coveted its shares become. In 2014, Apple examples of itemized deductions split its stock 7-for-1 to bring the price from about $140 a share to about $20 a share.
Companies typically conduct stock splits when the share price rises so high that it’s prohibitive for new investors. In terms of investor psychology, that dynamic can boost a stock’s prestige and increase demand. Suppose you own 100 shares of ABC Corp., which is currently trading at $6 per share.
Does the Stock Split Make the Company More or Less Valuable?
In July 2022, GameStop — the fairy-tale stock at the center of history’s greatest short squeeze — announced a 4-for-1 stock split. That’s just one of many tech-related splits that have made headlines in recent years — and they’re not all based on even numbers. Outstanding shares are those that are currently owned by someone or something other than the company itself. They’re held by the public, either through individual ownership or as components of a pension fund or mutual fund. After being a wallflower for years, GameStop (GME 1.23%) became a major player in the meme stock phenomenon.
Just as a stock price that is too high can be a burden to corporations, so too can one that’s too low. In those cases, companies will sometimes do a reverse stock split, in which they exchange one share of stock at a higher price for several shares at the current, lower price. Many stock splits are greeted by investors as good news, and shares sometimes rise as a result. However, some splits are seen negatively and may push the stock lower.
Calculating Reverse Stock Splits
There are some changes that occur as a result of a split that can impact the short position. The biggest change that happens in the portfolio is the number of shares shorted and the price per share. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split. This is because small investors may perceive the stock as more affordable and buy the stock.
A reverse/forward stock split is a special stock split strategy to eliminate shareholders holding less than a certain number of shares. A reverse/forward stock split consists of a reverse stock split followed by a forward stock split. The reverse split reduces the overall number of shares a shareholder owns, causing some shareholders who hold less than the minimum required by the split to be cashed out. The forward stock split then increases the number of shares owned by the remaining shareholders. When examining historical stock charts, be cautious since many platforms (but not company investor sites) automatically adjust backward the historical prices for stock splits.
While theoretically neutral events, stock splits often generate a positive market reaction because of increased accessibility, perceived growth signals, and behavioral factors. Companies typically carry out splits to keep share prices within a preferred range, potentially boosting liquidity and broadening their investor base. Meanwhile, reverse splits are often used to avoid delisting or improve institutional appeal. After a split, the stock price will be reduced (because the number of shares outstanding has increased).
But consider why the stock price is where it is, and splits seem to also be about the company’s fundamentals, too. There’s also a risk that the positive effects of a stock split may be short-lived. While splits often lead to a brief surge in annualized income installment method stock price and trading volume, these effects tend to diminish over time. Any gains will likely be temporary if the underlying business fundamentals don’t support the optimism generated.
