This has opened up a wide area of financial study called behavioral finance. Splitting the stock also gives existing shareholders the feeling that they suddenly have more shares than they did before. Here’s what you need to know about stock splits and why they’re not usually a big deal. The news isn’t all bad, as GameStop embraced its meme stock status in recent years to raise money and pay off virtually all of its debt. The company now boasts more than $1 billion in cash on its balance sheet, offset by just $42 million in long-term debt — an enviable position for a business of its size. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.
As is common in these situations, the brokerage will take care of the details and the additional shares will simply appear in investors’ brokerage accounts. It’s worth noting that it can take anywhere from a few hours to a few days for the additional shares to show up. They may not appear immediately after the market close on July 21 as the process and the timetable can vary slightly from brokerage to brokerage. All publicly traded companies have a set number of shares that are outstanding.
Imagine you own 100 shares of a company that’s undertaking a 2-for-1 forward split and is trading at $100 per share before the split. Following the split you would own 200 shares but the price would be adjusted to $50 per share. So you end up with the same $10,000 in dollar value that you had before the stock split.
Lastly, frequent stock splits might be seen as a form of financial engineering rather than a focus on fundamental business growth. Second, the higher number of shares outstanding can result in greater liquidity for the stock, which facilitates trading and may narrow the bid-ask spread. Increasing the liquidity of a stock makes trading in the stock easier for buyers and sellers. This can help companies repurchase their shares at a lower cost since their orders will have less impact for a more liquid security. These preferences aren’t rational in a purely economic sense, as the nominal share price shouldn’t matter. Behavioral finance researchers have been particularly interested in the stock split anomaly since it challenges the efficient market hypothesis.
- Calculating the cumulative effect of a company’s stock splits over time begins by identifying each split event to determine its impact on share count and price.
- A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes.
- Michael holds a master’s degree in philosophy from The New School for Social Research and an additional master’s degree in Asian classics from St. John’s College.
- This gives it a market capitalization of $400 million or $40 x 10 million shares.
- 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.
- When you choose a stock from the list, the calculator will also let you know whether any upcoming or recent stock splits apply.
If the 10 shares were valued at $4 per share before the reverse split, the five shares would be valued at $8 per share after the reverse split. A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder’s stake remains the same. Calculating the cumulative effect of a company’s stock splits over time begins by identifying each split event to determine its impact on share count and price.
Subscribe to Our Free Newsletter!
After the split, they will owe 200 shares (that are valued at a reduced price). If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender. Two-for-one and 3-for-1 stock splits are relatively common, says Holden.
Another disadvantage is a potential increase in the stock’s volatility. Lower-priced shares resulting from a split may attract more speculative trading, potentially leading to greater price shifts. This increased volatility is often undesirable for all companies or investors. Let’s summarize the advantages companies see when going through the hassle and expense of a stock split. First, a company often decides on a split when the stock price is relatively high, making it expensive for investors to acquire a standard board lot of 100 shares. The frequency of stock splits has decreased significantly since the late 1990s.
This decline coincides with the rise of algorithmic trading, the selling of fractional sales, and the acceptance of such prices by institutional investors. Stock splits often result in a bump in the stock’s price, simply because more investors are interested in the stock at the new price than were interested at the old price. This increased demand can drive up the price of the stock, at least in the short term. Although a stock split changes both the price and the number of a company’s shares, the combined value of those shares — the company’s market cap — always remains the same. The free market dictates the price of every publicly traded company’s stock. All share prices exist at the intersection of what the seller is willing to accept and what the buyer is willing to pay.
GameStop
Mutual fund splits typically occur when the price per share is too high, making the fund less accessible to smaller investors. In a mutual fund split, the number of shares an investor owns increases while the net asset value per share decreases proportionally, just like a stock split. While a split, in theory, should have no effect on a stock’s price, it often results in renewed investor interest, which can positively affect the stock price. While this effect may wane over time, stock splits by blue-chip companies are a bullish signal for investors. Some may view a stock split as a company wanting a bigger future runway for growth; for this reason, a stock split generally indicates executive-level confidence in the prospect of a company. A stock split is when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company’s market value.
You now own 50 shares of ABC Corp., but it’s trading at $12 per share. A stock split increases the number of shares a company has, but it doesn’t automatically make anyone any richer. There are some psychological reasons why companies split their stock but the business fundamentals remain the same.
What a Stock Split Is, Why Companies Do It, and How It Works, With an Example
If you owned 100 shares worth $50 each before a 2-for-1 split, you’ll own 200 shares worth $25 each after the split. This typically plays out with growth companies, comparable store sales which tend to consider soaring share prices to be evidence of their success. Value companies, on the other hand, are more likely to split their shares to entice new investors with a lower stock price.
Is a Stock Split Good for Investors?
The ability for more people to buy a stock can bump up its price, which in turn may actually increase a company’s value, at least temporarily, Holden says. To convert a quantity of pre-split shares to post-split shares across multiple splits, multiply the ratio value of each split together. For example, a single pre-split AAPL share in 1987 would have eventually been split into 224 shares after the 2020 split.
The main characteristic of a forward stock split is the increase in the number of shares available in the market. For instance, in a two-for-one a message from usa today network split, each share is divided into two, doubling the number of outstanding shares. You can automatically populate the current share price by using the search function within the calculator. When you choose a stock from the list, the calculator will also let you know whether any upcoming or recent stock splits apply. A look at GameStop’s recent results should provide insight into the company’s ongoing prospects, which is a better gauge than an arbitrary stock split.
Thus, while a stock split increases the number of outstanding shares and proportionally lowers the share price, the company’s market capitalization remains unchanged. This can increase liquidity (the ability to trade the stock easily) and trading volume. However, a stock split doesn’t change the company’s value—it simply redistributes ownership into smaller, more affordable units. However, stock splits are still used by companies to make their shares appear more attainable to retail investors. These company actions also tend to signal management’s confidence in future growth.