By                    Karen Doyle
  • What Is It
  • Why Companies Split
  • Is It Time To Buy

What Is a Stock Split?

A stock split occurs when a company decides that its stock has become too expensive and wants to lower the price. In order to have a lower stock price but maintain the company’s valuation, they split the stock. Each share of stock is split into multiple shares, but the overall value of the total number of shares — the market capitalization — remains the same. So the price per share before the split is divided by the number of shares in the split.

Here’s an example. Company ABC’s shares are trading at $500 per share. A shareholder who owns 100 shares of ABC stock has an investment worth $50,000. The company declares a 2-for-1 stock split. Now that same shareholder owns 200 shares of ABC, but each share is worth $250. The shareholder’s total position is still worth $50,000.

Why Do Companies Split Their Stock?

In a perfect world, a company’s stock will rise over time. It won’t gain value every day, of course, and there will be times when it goes down, but the overall trajectory is upward. Some companies’ stocks rise faster than others and some tech stocks have risen very quickly in a short period of time. The result of this, in addition to some very happy shareholders, is that the stock gets pretty expensive.

A company may feel that its stock is not viewed as affordable for the average investor if the price gets too high. So they split the stock, which lowers the price and — hopefully — attracts more investors, who then drive up the price.

Stock splits are common, particularly among tech stocks. Apple (APPL) stock has split five times since the company went public in 1980. Apple split 2-for-1 on June 16, 1987, 2-for-1 on June 21, 2000, 2-for-1 on February 28, 2005, 7-for-1 on June 9, 2014, and 4-for-1 on August 28, 2020.

Some companies never split their stock. Perhaps the best-known example of this is Warren Buffet’s company, Berkshire Hathaway, whose class A shares traded, as of June 6, 2022, at $468,400. This demonstrates the reasoning behind the stock split, as a single share of this stock is priced out of reach for many individual investors. Berkshire Hathaway also has Class B shares which are a little more affordable, trading on June 6, 2022, at $312.15.

A company may also choose to do a reverse stock split, where the number of shares is reduced, causing the share price to go up. In this case, a shareholder might have 100 shares of XYZ Company, valued at $5 per share. If XYZ Company declares a 1-for-2 reverse split, the shareholder would end up with 50 shares, worth $10 per share.

A stock split, in and of itself, does not change the value of the company, since the market capitalization — price per share times number of shares outstanding — remains the same before and after the split. But a split is often a sign that the company is doing well since the stock has risen to the point where a split makes sense.

Information is accurate as of June 6, 2022.