Artful Trader

What is a stock split?

With Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) each announcing stock splits so far this year, we thought it would be prudent to explain what this means for investors.

This article was originally published on MyWallSt Investing for Everyone.

 

When a stock splits, the share price goes down and the number of shares goes up.

 

  • If a company splits 2-for-1, 500 shares at $20 becomes 1,000 shares at $10.
  • Splits make stocks more liquid and more affordable to everyday investors.
  • How is it possible to turn 1 million shares into 2 million overnight?

 

By doing a stock split!

If you own 50 shares of WalMart (NYSE:WMT) and the company does a 2-for-1 stock split, you now have 100 shares of WMT stock.

Did you just double your money?

No, because in a 2-for-1 stock split, the share price gets cut in half.

If one share of Amazon (NASDAQ:AMZN), for example, costs $2,000, then only investors with over two thousand dollars could become shareholders. So, the thoughtful chaps running Amazon might make a decision to split shares 3-for-1. So in this example, one share is worth $2000 before the split and afterward there are three shares worth $666.67 each — same difference. However, now there are more shares on the market, making it even easier for people to buy and sell them.

During a split, the value of the company never changes, but it makes the company look more affordable to small investors – and they start buying. This can boost demand and drive up the stock price for a short time following the split.

 

What is a reverse stock split?

Just as a company like Google (NASDAQ:GOOG)(NASDAQ:GOOGL) may want to seem more affordable, smaller companies like Nio (NYSE:NIO) sometimes want to appear more expensive and, in turn, more reputable.

A stock that is valued at $1 per share can do a reverse 5-for-1 split and end up with a $5 stock and 1/5 as many shares on the market.

 

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