A stock split is a routine corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total value of the shares remains the same, as does the market capitalization of the company.

What is a Stock Split?

In a stock split, a company increases the number of its outstanding shares by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, a shareholder who previously owned one share now owns two shares. However, each share is now worth half of what it was before the split, so the overall value of the shareholder’s investment remains unchanged.

Why Do Companies Split Their Stock?

1. Increase Liquidity: By splitting the stock, companies make their shares more affordable to a larger number of investors. This can increase trading volume and liquidity.
2. Psychological Pricing: Lower-priced stocks are often perceived as more accessible to retail investors. A lower share price can make a stock appear more attractive, even though its market value hasn’t changed.
3. Marketability: A lower share price can make the stock more appealing and easier to trade. It may also meet the price range requirements of certain investment funds or indices.
4. Signal of Confidence: Companies often announce stock splits when they are confident about their future growth prospects. This can be a positive signal to investors.

Benefits of Stock Splits

The reasons why companies split their stocks doubles as the benefits for so doing.

1. Increased Liquidity: More shares at a lower price can attract a wider range of investors, boosting market activity.
2. Attractiveness to Small Investors: Lower prices can make stocks more accessible to small investors who might be priced out of higher-priced stocks.
3. Positive Market Perception: Stock splits can be seen as a signal that the company is doing well and expects continued growth.
4. Flexibility for Option Contracts: Lower share prices can make stock options more attractive and affordable.

Drawbacks of Stock Splits

1. Perceived Devaluation: Some investors might perceive the split as a dilution of value, even though the total market value remains the same.
2. Administrative Costs: Conducting a stock split involves administrative costs and complexity.
3. Short-Term Volatility: Splits can lead to short-term price volatility as the market adjusts to the new share structure.
4. No Fundamental Value Change: Stock splits do not change the underlying value of the company. They are purely cosmetic adjustments.

Examples of Past Stock Splits

1. Apple Inc. (AAPL): has had five stock splits since its IPO (of $22.00) in 1980.

• Date of Last Split: August 31, 2020
• Type of Split: 4-for-1
• Stock Price Before Split: Approximately $499.23 per share
• Stock Price After Split: Approximately $127.85 per share
• Current Stock Price: $216

This split made Apple’s shares more accessible to a broader base of investors and increased its liquidity.

2. Tesla Inc. (TSLA): has had two stock splits since it first went public in 2010.

• Date of 1st Split: August 31, 2020
• Type of Split: 5-for-1
• Stock Price Before Split: Approximately $2,213.40 per share
• Stock Price After Split: Approximately $442.68 per share
• Date of 2nd Split: August 25, 2022
• Type of Split: 3-for-1
• Stock Price Before Split: Approximately $900.00 per share
• Stock Price After Split: Approximately $300.00 per share
• Current Stock Price: $186

This move significantly lowered the price of Tesla shares, making them more appealing to retail investors.

3. Alphabet Inc. (GOOGL): Alphabet, the parent company of Google, has only split its stock twice since its inception.

• Date of 1st Split: April 3, 2014
• Type of Split: < 2-for-1
• Stock Price Before Split: Approximately $1,135.10 per share
• Stock Price After Split: Approximately $567.55 per share

This split gave each shareholder a new class (C) of stock for each stock held and 0.998 of the existing class A stock.

• Date of 2nd Split: July 15, 2022
• Type of Split: 20-for-1
• Stock Price Before Split: Approximately $2,255.34 per share
• Stock Price After Split: Approximately $112.64 per share
• Current GOOG Stock Price: $177.28
• Current GOOGL Stock Price: $175.76

This split aimed to make Alphabet’s high-priced shares more affordable and increase trading activity.

Fyi, Alphabet has three different classes of shares; GOOG (Class C – no voting rights), GOOGL (Class A – has voting rights), and the Founders’ Class B shares which are not available to the public.

Stock splits are routine market operations utilized by companies to enhance the attractiveness and accessibility of their shares.

The above examples from Apple, Tesla, and Alphabet highlight how major companies have successfully employed this strategy to adjust their share prices and potentially boost market activity.

Understanding the context and details of these splits can provide investors with valuable insights into the effects of such corporate actions.

Stock splits are strategic moves by companies to make their shares more accessible and appealing to a broader range of investors. While they do not change the fundamental value of the company, they can have significant effects on the stock’s liquidity and market perception. The high-profile technology company examples like Apple, Tesla, Alphabet, and Nvidia (below) show that even the biggest companies use stock splits to maintain their stock’s attractiveness and marketability.

Recent Stock Split

Nvidia (NVDA): Nvidia has undergone stock splits in the past. Its latest stock split of 10-for-1 was on June 7, 2924 makes it the company’s sixth since its inception.

• Date of last Split: June 7, 2024
• Type of Split: 10-for-1
• Stock Price Before Split: Approximately $1,200 per share
• Stock Price After Split: Approximately $120 per share
• Current Stock Price: $132.33

The split was aimed at making the stock more affordable and increase liquidity, attracting a broader range of investors.

Proposed Company Stock Splits

Several companies have proposed stock splits for the near future. Here are a few noteworthy ones:

1. Virgin Galactic Holdings Inc (SPCE) implemented a reverse 1-for-20 stock split today. This will consolidate every 20 shares into one, thus increasing the stock price proportionately. According to InvestorPlace, “SPCE stock closed at 68.49 cents on Friday and had not closed above $1 since May 21.” The NYSE may delist stocks that close at less than $1 for 30 consecutive trading days. SPCE’s current stock price, after the reverse split, is $11.78.
2. Chipotle Mexican Grill (CMG) has scheduled a forward 0.02-for-1 split for June 26, 2024, where each share will be split into a smaller fraction, effectively reducing its price per share. Chipotle’s current stock price is a whooping $3,371. I have practically watched CMG’s share price more than doubled in the past 12-15 months.
3. Broadcom Inc (AVGO) will undergo a forward 0.10-for-1 split on July 15, 2024, which will similarly lower its per-share price to make it more affordable for investors. AVGO’s current stock price is $1,832.00.

These proposed stock splits are typically intended to enhance liquidity and make the stock more attractive to a wider range of investors by lowering the share price through a forward split, or to meet listing requirements and manage share prices through a reverse split.

If you’re interested in knowing more about companies’ proposed stock splits calendar, visit TipRanks.

Conclusion

Understanding the reasons behind stock splits and their potential benefits and drawbacks can help investors make more informed decisions when they see these announcements.

“The best time to plant a tree was 29 years ago. The second best time is now!”

– Unknown

If you haven’t gotten into investing in stocks yet, now is the time.

This post and its information are from personal experiences and from my desire to learn, teach, and help others.

I am not a certified financial advisor. As such, please seek professional advice and do your due diligence before making any investment decisions in stocks.