A stock split is a decision in which a company increases the number of shares it has, but the total value or market cap of the company remains unchanged.
Suppose the price of a stock is $1,000 and you buy 1 share. The company does a 2-for-1 split. Now you will have 2 shares, but the price of each share will be $500.
Your total value remains the same: $1,000.
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Why do companies do stock splits?
1. Making the stock look “cheaper”:
If a company stock reaches $5,000, it may seem expensive to ordinary investors. By splitting the stock, it can be brought down to prices like $1,000–$1,500 so that more people can invest in it.
2. Ease of trading (Liquidity):
Low-priced shares are easily bought and sold. More investors can join, which increases the trading of the stock.
3. Giving positive signals:
When a company splits its shares, the market gets the signal that the company has a bright future and the company’s growth has been good.
4. Matching with other companies in the sector:
If the share price of a company becomes much higher than other companies, then it can be brought to parity by splitting.
How does a stock split work?
Suppose you have 100 shares of a company, each share worth ₹1,000.
1. Before the split:
You have 100 shares × $1,000 = value of $1,00,000.
2. After the 2-for-1 split:
You will now have 200 shares, each worth $500.
The total value is still $1,00,000.
That is, only the number has changed, not your assets.
Types of Stock Splits
1. 2-for-1: For every 1 share, you get 2.
2. 3-for-1: For every 1 share, you get 3.
3. 3-for-2, 4-for-3, 5-for-4: These also exist, but are less common.
In some cases, if the split creates fractional (half or quarter) shares, the company may give you cash in exchange.
What is a reverse stock split?
A reverse stock split is a move in which a company reduces the number of shares it has and increases the price of each share.
Example:
1. Earlier you had 100 shares, each worth $ 20. Total value $ 2,000.
2. Now the company does a 5-for-1 reverse split.
3. Now you will have only 20 shares, but each will be worth $ 100.
Total value still $ 2,000.
This usually happens when the share price falls too low and the company wants to bring it up to avoid delisting from the stock exchange.
How do stock splits appear in charts?
You might think that after a split, the stock price should suddenly drop by half in the chart. But showing this is confusing.
That’s why platforms like Yahoo! Finance and Google Finance adjust historical prices by the split ratio. This keeps the graph straightforward and understandable.
How does a stock split affect short sellers?
If you short a companies shares, the split does not change your overall liability.
Example:
- You shorted 100 shares at $1,000.
- The company now does a 2-for-1 split.
- You now have to return 200 shares, but each one will be worth $500.
The total amount remains the same. Only the number of shares and the price change.
Should you buy a stock before or after a stock split?
Simple answer: It does not matter.
A stock split is a mathematical change, not a real change in the value of the company. If the company is good, it will grow before and after the split.
So don’t invest just in the name of split. Look at the real performance of the company.
Should you buy a stock before or after a stock split?
Simple answer: It doesnot matter.
A stock split is a mathematical change, not a real change in the value of the company. If the company is good, it will grow before and after the split.
So do not invest just in the name of split. Look at the real performance of the company.
Real example: Apple Inc.
In June 2014, Apple did a 7-for-1 stock split.
- The stock price before the split was approximately $649.
- After the split, it fell to $92.70 (649 ÷ 7).
This allowed more investors to purchase Apple shares and increased trading volume.
Key Takeaways
- A stock split increases the number of shares but the total value of the company remains the same.
- It is done to make the stock look cheaper to investors.
- It speeds up trading, That is, increases liquidity.
- Most common splits: 2-for-1, 3-for-1.
- A reverse split decreases the number of shares and increases the price.
- Graphs and charts show the change as an adjusted price.
- There is no financial impact on short sellers.
- Buying before or after a split is the same—the difference is in the companies actual performance.
- A split would not make you rich, but it can be a sign of a company’s strength.
A stock split is an interesting phenomenon that does not change the health of a company, but can affect the market’s perception and position of its stock. As an investor, always look at the companies fundamentals—not just whether or not a stock split has taken place.
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