What Is a Stock Split?

“You might not be able to buy Apple at $500, but you could buy it at $125,” she says. Elon Musk has been feeling “super bad” about the economy and initially promised to lay off 10% of Tesla’s workforce. She worries investors won’t be excited about the possibility of owning TSLA stock on the cheap.

The total value of all the shares combined stays the same, but the price of each individual share is now lower. Let’s say there’s a company called Thingamabob Industries that currently has 10,000 shares available for investors to buy and sell out in the stock market. Over the past few years, Thingamabob has become a very successful company that many people want to invest in, but the price of the company’s stock has skyrocketed to $1,000 per share. The potential solution to that problem is what’s called a stock split. A stock split happens when a company decides to split up all of its existing shares into multiple new shares in order to lower the price of each share of the company’s stock.

  • Some on Twitter were speculating that given the precipitous tech stock selloff, a stock split will allow more retail investors to rush in now and buy shares or “hold the bag” to support the stock price.
  • Tesla isn’t the only high-growth company whose share prices are dropping today, nor is it the only EV stock down.
  • However, the one detail that does, in fact, change is that more pieces can be distributed to people who may not have a slice.
  • However, the market capitalization of the company remained largely unchanged at $556 billion.

However, larger companies may decide to have much higher stock split ratios, for example. And stock split or no stock split, investing in single stocks is still a risky way to invest. Sure, stock splits might grab some headlines and cause people to take another look at a company’s stock that might have been too expensive to invest in before.

Smart for Life Announces 1-for-3 Reverse Stock Split

Thus, a split is often the outcome of growth or the prospects of future growth and is a positive indication. Furthermore, the value of a stock that has just split might witness an uptick since the lower nominal share price typically attracts new investors. On the other hand, the price per share after the 3-for-1 stock split will be reduced by dividing the old share price by 3. That’s because a stock split does not alter the company’s value as measured by market capitalization. A stock split happens when a company increases the number of its shares to boost the stock’s liquidity.

Reverse stock splits are proposed by company management and are subject to consent from the shareholders through their voting rights. If a company is required to file reports with the SEC, it may notify its shareholders of a reverse stock split in a number of ways, including on Forms 8-K, 10-Q or 10-K. A stock split makes it easier for investors to buy whole shares of a company stock by lowering the price tag.

Julia Horowitz of CNN Business recently speculated Tesla’s old trick might not prove effective at generating the type of momentum TSLA stock needs. Historically, buying before the split was a good strategy due to commissions weighted by the number of shares you bought. It was advantageous only because it saved you money on commissions. This isn’t such an advantage today since most brokers offer a flat fee for commissions.

Meanwhile, those really high share prices also make it a little more difficult for folks who already own Thingamabob stock to find buyers if they wanted to sell. None of these reasons or potential effects agree with financial theory. A finance professor will likely tell you that splits are totally irrelevant—yet companies still do it. Splits are a good demonstration of how corporate actions and investor behavior do not always fall in line with financial theory. This very fact has opened up a wide and relatively new area of financial study called behavioral finance.

This effectively boosts demand for the stock and drives up prices. Another possible reason for the price increase is that a stock split provides a signal to the market that the company’s share price has been increasing; people may assume this growth will continue in the future. A company would primarily pursue this corporate action to bump its per-share price.

The tax basis of each share owned after the stock split will be half of what it was before the split. The process of a stock split is expensive, requires legal oversight, and must be performed in accordance with regulatory laws. The company wanting to split their stock must pay a great deal to have no movement in its over market capitalization value. A 2 for 1 stock split doubles the number of shares you own instantly. Two-for-one and 3-for-1 stock splits are relatively common, says Holden. While Apple (AAPL) and Tesla (TSLA) have gotten a lot of publicity for their 2020 stock splits, their 5-for-1 or 4-for-1 stock splits were uncommon choices.

Why do companies split stock?

However, the overall value of your investment wouldn’t change (at least in theory). So a forward split results in more outstanding shares but a lower price for each share, with no net gain or loss in the company’s overall market value. There are several reasons companies consider carrying out a stock split. As the price of a stock gets higher and higher, some investors may feel the price is too high for them to buy, while small investors may feel it is unaffordable. Splitting the stock brings the share price down to a more attractive level. While the actual value of the stock doesn’t change one bit, the lower stock price may affect the way the stock is perceived, enticing new investors.

What’s Happening with TSLA Stock

If you’re confused about stock splits, below is a breakdown of how they work, so you can set your expectations. In the case of a short investor, prior to the split, they owe 100 shares to the lender. After the split, they will owe 200 shares (that are valued at a reduced price). If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender. When an investor shorts a stock, they are borrowing the shares with the agreement that they will return them at some point in the future.

Examples of a stock split

It doesn’t mean the company is guaranteed to continue growing or not. So the board of directors at Thingamabob get together and decide to preparing a trial balance for your business do a stock split. In this case, they want to split every single existing share into four new shares (this is called a 4-for-1 split).

Companies who want to expand their shareholders and potential investors both benefit from a stock split. The type of stock split can impact the total number of shares available. For instance, if a company issues a 2/1 stock split, the value of each share is cut in half.

Slicing the market pie: How stock splits work and why they matter

As with a forward stock split, the market value of the company after a reverse stock split remains the same. While a split, in theory, should have no effect on a stock’s price, it often results in renewed investor interest, which can have a positive effect on the stock price. While this effect may wane over time, stock splits by blue-chip companies are a bullish signal for investors.