10 things you need to know about stock splits (2024)

What are stock splits? –Stock splits occur when a company increases its outstanding shares to make the stock more affordable to investors. For example, instead of a stock trading for $1,000 per share, a 10-to-1 stock split would allow it to trade for $100 per share. part (FIGURE 1), while the number of shares held would have increased tenfold. This is also called a forward division.

Benefits of Forward Splits –Companies tend to implement forward stock splits when the prospects for continued growth and profitability are strongest. Making it easier for investors to buy shares at a lower share price also allows companies to expand their ownership base. From time to time, stock splits are followed by a rise in stock performance, but not always.

No tax due! –Stock splits are not a taxable event, but an investor's cost basis in a stock must be adjusted to reflect a split. For example, after a 2-for-1 stock split, the cost basis of each share you own after the split will be half of what it was before the split.

Do mutual funds divide just like individual stocks? –Yes. Mutual funds split in the same way as individual companies, but it is much less common. These divisions help bring in new money and make the fund more marketable. Mutual fund investors can benefit when individual companies conduct stock splits if the fund they own owns those companies.

Are stock splits beneficial for investors? –It is nice to own more shares after a split, because the price per share is lower. stock could mean there is room for greater potential price growth. But investors shouldn't buy a stock simply because they hope its price will rise after a split. In the long term, a company's value is determined by its profits, not its stock price.

A recent example -In early 2022, the rate per The share price of Alphabet, Google's parent company, rose to almost $2,200 – a high threshold for many mainstream investors. But in February 2022, Alphabet announced a 20-for-1 stock split, effective July 14, 2022. That brought the stock price down to a more affordable $113.

What is the most common stock split ratio? –A 2-to-1 stock split is the most common ratio. Three-for-two splits are also common, but fractional splits are not unheard of. In 2021, electric truck maker Rivian implemented an 8.52859-for-1 split.

What is a reverse split? –In a reverse stock split, a company decides to reduce the number of shares outstanding to make the shares more expensive for investors. For example, instead of a stock trading for $5 per share, a 10-for-1 reverse stock split would allow it to trade for $50 per share. part (FIGURE 2). Shareholders end up with 10 fewer shares for each share they previously owned.

But isn't a lower stock price better? –Not always. A stock price can fall so low that a company's reputation can be jeopardized. Other times, a price falling below a certain threshold can cause the stock to be delisted from an exchange or removed from certain mutual funds. Reverse splits are rare and are sometimes seen as a sign of turmoil in the business community.