A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price.
There has been a bit of a trend among mega-cap tech stocks, with Apple (AAPL), Tesla (TSLA), Google parent Alphabet (GOOG) and Amazon (AMZN) having issued stock splits. Now Nvidia (NVDA) will be joining the club, announcing a 10-for-1 split that will take effect on June 7.
A company typically announces a stock split several weeks before it occurs. Consequently, there is a window between the announcement and the stock split. You would not want to base your decision to buy (or sell) a stock based solely on a stock split.
How to take advantage of a stock split
- You need to be a shareholder by a certain date, specified by the company, to qualify for a stock split.
- If you're not yet an investor in a company, and a stock split has made its share price more affordable, you'll want to research the stock to ensure it's a good investment for your portfolio.
- If it is, you can follow our guides to learn how to buy and trade stocks or fill in our simple application form and create an account to get started in minutes.
- You can speculate on the stock price movements via Contract for Differences (CFDs) or buy shares of stock outright.
- With CAPEX.com you can access 2,000+ CFDs on shares and 5,000+ stocks listed on 10 global stock exchanges.
What is a stock split?
A stock split is a decision by the company to increase the number of outstanding shares by a specificized multiple. However, the total value of all shares outstanding remains the same because a split does not fundamentally change the company's market capitalization.
When a company decides to split its stock, it determines the ratio for the split. The most common split ratios are 2-for-1 or 3-for-1, which means every single share before the split will turn into multiple shares after the split.
What happens when a stock splits?
A stock split doesn't make investors rich. In fact, the company’s market capitalization, equal to shares outstanding multiplied by the price per share, isn’t affected by a stock split. If the number of shares increases, the share price will decrease by a proportional amount.
However, investors generally react positively to stock splits, partly because these announcements signal that a company’s board wants to attract investors by making the price more affordable and increasing the number of shares available.
For those who aren’t already shareholders, though, a stock split can provide motivation to buy. For example, if you couldn’t afford a share of Nvidia before its recently announced stock split, you might be able to get one now.
The ability for more people to buy a stock can bump up its price, which may increase a company’s value, at least temporarily. Studies show that stocks that have split have gone on to outpace the broader market in the year following the split and subsequent few years.
Calculating market capitalization
Let's say a stock trades at $800 and has 200M shares issued. This gives it a market capitalization of $160B or $800 x 200M shares. The company then implements a four-for-one stock split. Shareholders receive 3 additional shares for each share they currently own.
Now they have four shares for each one previously held but the stock price is cut by 75% from $800 to $200. The market cap stays the same, multiplying the number of shares outstanding to 800M and simultaneously reducing the stock price by 75% to $200 for a capitalization of $160B.
How does a stock split impact your holdings/portfolio?
The critical thing to understand about a stock split (including a reverse stock split) is that the proportional ownership of your position is unaffected by the split, and it is the market that will determine the impact on the total value of the position. While the number of shares owned changes after a stock split, the split itself does not change your stock investment value.
Each stockholder receives an additional share for each share held in a two-for-one stock split, but the value of each share is reduced by half. Two shares now equal the original value of one share before the split.
How does stock split/consolidation affect my CFD account?
If you have a position on a company that performs a stock split or consolidation, the online broker closes your original position at its opening level and opens a new trade on your behalf. The new position will reflect the ratio of the split/consolidation, ensuring that you don’t gain or lose any capital in the process.
If you have a stop order attached to your position, the broker closes the original position at its opening level and opens a new position that reflects the terms of the offer. Any stops or limits attached will also be adjusted accordingly, ensuring that your monetary risk remains the same.
Why do companies split their stock?
There are several reasons for stock splits. However, there are two that are most common.
The first is perceived company liquidity. With each share’s price dropping a certain percentage – depending on the ratio that the company decides to use – investors tend to see the company’s stock as more affordable, and therefore may be more likely to buy shares. The lower the share price, the less risky the stock seems.
The second is psychology. A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price.
The move is a useful strategy when a company’s stock price rises to a level that prices many investors out, or when the price has risen significantly higher than its competitors’ stock.
Why are investors interested in stock splits?
Some investors believe that a forward stock split is a signal by management to investors that the company believes the stock value is attractive. Moreover, the stock may become more accessible to additional investors at a relatively lower price.
It can be the case that a company's stock price may rise immediately after a stock split announcement (due to this management-signalling effect). There is some evidence that companies who split their stock outperform the broad market over the near term.
Of course, this does not mean a stock will rise after a stock split announcement or when it goes into effect. Without strong earnings, dividend growth, or some other positive news for the company following the stock split, any gains made by the stock following the stock split announcement would likely fall back to (or below) the presplit announcement.
A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company. If you have determined that you want to buy the stock of a company that has announced a split, your decision when to buy can be based on your research, objectives, risk constraints, and any other considerations relative to your strategy.
Other management decisions regarding its stock—such as changes to a dividend payment or a new stock offering—have implications for the company's fundamentals, and thus, your investment value. But a stock split does not.
Stock split examples
There have been many famous stock splits in recent history, including large companies such as Apple, Tesla and Amazon. One company with many stock splits is Walmart, which has had 11 stock splits in its history.
The examples below show how stock splits can help make high-value stocks more reachable for everyday investors while maintaining the same overall investment value.
Nvidia stock split
The chipmaker Nvidia (NVDA) announced a 10-for-1 stock split on May 22, 2024, offering a reason for its decision: "to make stock ownership more accessible to employees and investors". This means that for every share of Nvidia stock an investor owned before the split, they would now hold ten shares--if an investor had one NVDA share valued at $1,000 before the split, they would have instead ten shares at $100 each after the split.
But note that the total value of the investor's holdings and the company's market capitalization remain unchanged. Before the split, NVDA's market capitalization stood at just over $2.5 trillion, making it one of the most valuable companies in the world and one of the best stocks to buy in 2024.
That figure represents 2.5 billion shares outstanding with a market price of roughly $1,000+ per share. After the split, there will be ten times as many shares: 25.0 billion, with an initial value of around $100+--which would still equal $2.5 trillion when you multiply the share price by the number of shares outstanding.
Apple stock split
On the 30 July 2020, with its stock at $380, Apple announced a 4 for 1 stock split. The share price was already on an upward trend, but the announcement accelerated the trend and three weeks later the shares were at $497 – a 30% increase. By the 1st of September Apple's market-cap reached $2.3Tr., surpassing the value of the entire FTSE100 ($2.1Tr. on the same day).
There are many reasons for Apple's success, but its positive share price trend clearly accelerated after news of the split. This can be seen in the chart below, with the vertical blue line indicating the date on which Apple announced their most recent stock split.
Stock split pros and cons
There are plenty of arguments over whether stock splits help or hurt investors.
One side says a stock split is a good buying indicator, signalling that the company's share price is increasing and doing well. Critics would say this strategy is not time-tested and is questionably successful at best.
Advantages of a stock split
Why do companies go through the hassle and expense of a stock split? 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.
- Lower share price makes it more attractive for small investors
- More shares in the market can lead to increased liquidity
- Can boost investor sentiment and confidence
- Can signal management's confidence in the company’s future performance
- Can make employee stock options more attractive
Disadvantages of a stock split
Not all facets of a stock split benefit a company. 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.
- May create a misleading perception of increased value or growth
- Can cause short-term fluctuations in stock prices
- Does not improve the company's actual valuation or financial health
- Although the total earnings remain the same, EPS gets diluted, which can be perceived negatively
Stock splits vs. reverse stock splits
Depending on market developments and situations, companies can take several actions at the corporate level that may impact their capital structure.
A traditional stock split is also known as a forward stock split. A reverse stock split is the opposite of a forward stock split.
What is a reverse stock split
A company carrying out a reverse stock split decreases the number of its outstanding shares and increases the share price proportionately. As with a forward stock split, the market value of the company after a reverse stock split remains the same.
If you owned 100 shares of stock in a company, for example, and the board announced a 1-for-4 reverse stock split, you’d end up with 25 shares of stock. The total value of your shares would remain consistent. If the 100 shares were valued at $5 per share before the reverse split, the 25 shares would be valued at $20 per share after the reverse split. In either case, the total value of your investment remains $500.
A company that takes this corporate action might do so if its share price had decreased to a level at which it runs the risk of being delisted from an exchange for not meeting the minimum price required for a listing. Certain mutual funds may not invest in stocks priced below a preset minimum per share, or penny stocks. A company might also opt for a reverse split to make its stock more appealing to investors who may perceive higher-priced shares as more valuable.
How to trade and invest in a stock split
Companies announce plans to split their stock in advance, which often causes pre-split fluctuations in the market, creating multiple opportunities for short-term stock speculation or long-term investments.
Trading stock CFDs
You can trade stocks with financial derivatives like CFDs. These let you take a position without owning the stock outright, and you’ll be able to trade with leverage – granting you full market exposure for an initial deposit known as margin.
With CFDs, you can go long to speculate on the share price rising before the stock split or on the short-term effect, as well as short to speculate on it falling. This could be useful after the company splits its stock, because there will likely be increased market fluctuations and price movements could be unpredictable for a time.
Trade stock splits with CAPEX.com
You can speculate on whether a share price will rise or fall following its stock split. All you have to do is:
- Open a CAPEX.com Trading Account, or log in if you’re already a customer
- Search for the company you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Alternatively, you can practice your trading strategy first in a risk-free demo account.
Investing in stocks
Investors buy shares outright in the hope that they will increase in price after the split and can be sold later for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer time, trying to benefit from share price changes and dividend payments after the split.
While this means that they might need more initial capital to get started when compared to stock trading, their losses would be capped at this initial outlay. That said, investors should be aware that they might receive back less than they initially invested.
Invest in stock splits with CAPEX.com
You can buy and hold shares for a long period of time following its stock split. All you have to do is:
- Open a CAPEX.com Invest Account, or log in if you’re already a customer
- Search for the company you want to buy in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the order
Alternatively, you can practice your investing strategy first in a risk-free demo account.
Final words about stock splits
Stock splits can be a lucrative and important step for companies looking to draw in more investors. This is particularly true for companies that are experiencing rapid growth. A company that is growing or believes it will grow may choose to split their stock, giving a positive indication of growth to investors, which ultimately helps it grow.
If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not.
If you don't own the stock of a company that executes a stock split, the share price will be more affordable.
Free Resources
Before you start trading a stock split, you should consider using the educational resources we offer, like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.
Sources
- https://www.sec.gov/answers/stocksplit.htm
- https://www.finra.org/investors/investing/investment-products/stocks/stock-splits
- https://www.investor.gov/introduction-investing/investing-basics/glossary/reverse-stock-splits
- https://rpc.cfainstitute.org/en/research/cfa-digest/2013/11/why-are-stock-splits-declining-digest-summary