What a Stock Split Is and How It Works With an Example

What Is a Stock Split?

A stock split occurs when a company increases its shares to boost liquidity. While the number of shares increases, the total value remains the same.

Key Takeaways

– A stock split boosts liquidity by increasing the number of outstanding shares.

– The total market capitalization remains unchanged.

– Common split ratios are 2-for-1 or 3-for-1.

– A stock split lowers the price per share, making it more affordable without losing value.

– Reverse stock splits decrease the number of shares and raise the share price.

How a Stock Split Works

A stock split is when a company issues additional shares to shareholders. This increases the total by a specified ratio. Stock splits are often done to lower the trading price and increase liquidity.

Advantages of a Stock Split

– It makes shares more affordable for investors.

– It improves liquidity and trading.

– It can renew investor interest and have a positive effect on the stock price.

Disadvantages of a Stock Split

– It can be expensive and require legal oversight.

– It does not create additional value.

– It may attract the wrong crowd of investors.

– It can have implications for compliance and delisting.

Example of a Stock Split

In August 2020, Apple split its shares 4-for-1. The market capitalization remained largely unchanged.

Stock Splits vs. Reverse Stock Splits

A stock split increases the number of shares, while a reverse stock split decreases the number of shares. The market value remains the same.

What Happens if I Own Shares That Undergo a Stock Split?

When a stock splits, shareholders receive additional shares at a reduced price. Your broker will handle this automatically.

Will a Stock Split Affect My Taxes?

No, the receipt of additional shares does not result in taxable income. The tax basis of each share owned after the split is reduced.

Are Stock Splits Good or Bad?

Stock splits are generally a positive signal. They make shares more accessible and can attract new investors.

Does the Stock Split Make the Company More or Less Valuable?

A stock split does not change the company’s overall value. The share price adjusts accordingly.

Can a Stock Split Be Anything Other Than 2-for-1?

Yes, any approved ratio can be used for a stock split. Split ratios may vary, such as 3:1, 10:1, or 3:2.