What is a Stock Split?
All publicly traded companies have a set amount of shares that are outstanding. An outstanding share is simply a share held by any shareholder, including shares held by institutional investors and shares owned internally within the company. In order to increase liquidity (lower the value of each share so that they are more likely to be traded), companies may perform stock splits. This essentially takes one share and divides it into multiple shares. The value of the stock stays the same, but each individual share is lowered to create more shares.
Here is a real life example..
Recently, Apple announced that it was doing what’s called a 4-for-1 stock split this month. But what does that even mean? Simply, if you owned 1 share of Apple, you now would own 4 shares. So does that mean your money has quadrupled? Unfortunately, no!
Here’s what happens:
Let’s say Stock XYZ was worth $100 on Monday.
On Tuesday, they do a 4-for-1 stock split.
That single share you owned is now 4 shares, but each is now worth $25 instead of $100.
At the end of the day, you still own $100 worth of shares.
You don’t have to do anything in this scenario; your shares will automatically be converted. You can just let the stock continue to increase in value (hopefully).
Some companies decide to do 2-for-1 splits, 3-for-1 splits, or splits of other sizes. Some other famous stock splits include:
Apple’s 7-for-1 split in 2014
Exxon Mobil’s 2-for-1 split in 2001
Fedex’s 2-for-1 split in 1999
Coming soon: Tesla just announced a 5-for-1 stock split coming at the end of August! So if you own one Tesla stock today, you’ll own 5 as of August 31st.
Key Takeaways:
A stock split is an action taken by a company to divide existing shares to create a higher quantity of lower-valued shares.
The idea of this move is to make shares seem more affordable.
The most common split is 2-for-1 or 3-for-1, meaning the shareholder will hold double or triple the amount of shares than prior to the split.
Companies can take the opposite action, and divide stocks, instead of multiplying them. This is called a reverse stock split.
Ex: Stock XYZ was worth $100 on Monday. On Tuesday, the company does a reverse stock split. That single share you owned is now half of a share, now worth $100. At the end of the day you still own $100 worth of shares, but it’s represented in half a share, as opposed to one share.
Source: Investopedia
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