Stock Splits: What You Need to Know
It’s very easy to find misleading information about investments, especially when so many sources are now available at our fingertips. Considering the numerous stock splits that happen on a regular basis, we wanted to clarify what a stock split is, why they’re done, and what the impact to the investor is.
Let’s first break it down: a stock split divides 1 share of stock into several shares (2,3,4, etc.). In the commonplace 2 for 1 split, the shareholder who owned 1 share now owns 2 shares. The price of each new share is now ½ of what it was before the split (1/3 the price for 3, ¼ the price for 4, etc.).
So why would a company decide to split their stock? One of the primary reasons is if they believe the price is trading at a high dollar value. Lowering the price of the stock can make it more marketable to the public. A company may also initiate a reverse split, issuing 1 new share for each 2 shares, doubling the stock price. A common reason for this would be if the stock is at risk of being delisted from a stock exchange (NYSE, NASDAQ have minimum share prices).
The impact to the investor is negligible since the total value of the position remains the same. There may be small price movements because of the announcement of the split, but this has very little, if anything to do with the fundamentals of the split itself. The decision to buy, sell, or hold a stock shouldn’t be based on the company’s decision to split the stock.
If you have questions about a previous or upcoming stock split, don’t hesitate to contact us!