Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Stock splits and fractional shares

A stock split is when the price of a stock reduces and the number of outstanding existing shares​ increases proportionately. Companies often do this to make the price more accessible to a wider range of investors. There is no change in the value of a company when a stock splits, such as its market capitalisation, and there is no change in the value of the investor’s holdings.

Stock splits often result in fractional shares for investors. Fractional shares represent a portion of an equity that is less than a full share. Until recently, fractional shares were only created by stock splits and dividend reinvestment plans, but they are now offered by some brokers to trade. This article explains how and why stock splits occur, how fractional shares work, and what this means for your share positions for account holders on our Next Generation trading platform​.

See inside our platform

Get tight spreads, no hidden fees and access to 11,000 instruments.

What is a stock split?

A stock split is a corporate action​ that describes when a company reduces its price per share and simultaneously increases the existing shares.

For example, if a stock is trading at $100 and there is a two-for-one (2/1) split, for each share that you own, you will end up with two shares worth $50. There is no change in value; if you owned 200 shares at $100, you would now own 400 shares at $50. The value of the shares in dollar amount is the same, which stays at $20,000 in both cases.

In terms of what happens with the company, its market capitalisation (share price x number of shares outstanding) will stay the same as before the stock split. Its share price may be reduced but the number of shares outstanding increases proportionately.

There are various split ratios that can occur. A company could give 1.5, 2, 3 or 10 shares for each share outstanding, resulting in a split ratio of 1.5/1, 2/1, 3/1, or 10/1. The company can pick any ratio it desires to achieve the target share price.

What are the reasons for a stock split?

The main reason for a stock split is so that a company can reduce its price per share on the stock market, as it hopes to attract a wider audience of investors. Stock splits usually happen when the value of a company's stock is becoming too high.

For example, some investors may not be interested in buying stock that is priced at $500 per share. They view it as too expensive, even though the price may be warranted by the high value of the company. Therefore, if the company decides to do a 10/1 stock split, the price drops to $50 and there are now 10 times more shares outstanding. At $50, the stock may seem more reasonable, thus convincing more people to invest.

With possibly more people willing to invest and more shares to be traded, volume in the stock may also increase. Increased volume or liquidity also makes a stock more attractive to investors as it is easier to enter and exit positions, as there are always others waiting to buy and sell. However, this can also increase volatility if the stock is highly sought after. Learn more about volatility trading​.

Trading charts​, such as the ones found on our Next Generation trading platform, are often adjusted to reflect a stock split. For example, if a stock has a 2/1 split, all historical price levels are divided by two, so there is not a large one-day drop on the chart.

The effect of stock split on share price

Stock splits have an immediate effect on price in that the share price changes based on the split ratio. The stock price drops to the target level that the company’s directors have agreed on, which increases the number of shares outstanding.

These actions can also have longer-term effects. In the case of a stock split, there have been a number of studies that indicate stocks that split tend to outperform the market indexes over the next one year to three years. This may be because of the increase in buyers and subsequent interest in the stock due to its lower price, or it could simply be because the stock price had been climbing higher, resulting in the stock split in the first place.

Reverse stock split

Reverse stock splits work in the opposite way to traditional stock splits, in that they reduce the number of shares outstanding while increasing the stock price. Companies with falling stocks prices will often do this to make their shares look like they are worth more.

Once again, the company determines the split ratio. It could be 1/2, 1/10 or any other ratio. For example, let’s assume that a company has seen their stock price fall from $20 to $0.50. While it has dropped considerably, which may attract a few buyers, the low price may scare off other investors. These wary investors may question why it has become a penny stock​ and decide not to trade.

If the company does a 1/10 stock split, for every 10 shares you own, you will end up with one, but that one share will be worth 10 times as much. In this case, the share price will increase to $5 (from $0.50) and the number of existing shares is divided by 10.

Similar to an original stock split, trading charts are adjusted to reflect the reverse split ratio. For example, if a stock has a 5/1 split, all historical price levels are multiplied by five so there is not a large one-day jump on the chart when the reverse split occurs.

While reverse stock splits can make a stock appear worth more, unless the company does something to turn their situation around, their stock price is likely to keep falling as it was before. Therefore, caution should be taken when traders are considering investing in stocks that have recently had a reverse split, as this may result in losses over the long-term.

Join a trading community committed to your success

What are fractional shares?

Fractional shares are created when there is a stock split that results in shares getting cut into fractions. These can also be the result of automatic dividend reinvestment plans. The dividend amount may only be enough to buy a fractional share, which is credited to the investor’s account.

Some stockbrokers also offer fractional share trading so that investors have easier access to high-priced stocks. Fractional share trading means that an investor can buy a portion of one share, as opposed buying a full share or many shares. Investors typically utilise fractional shares in stocks and exchange-traded funds (ETFs) with a high price tag.

Fractional shares are a portion of a full share, which allow people to choose a dollar amount they wish to invest as opposed to the number of shares. For example, if a stock is trading at $100 and a trader wants to invest $150, they could buy one full share and one-half share. If fractional shares are not available to trade, this person would have to decide between investing $100 (one share) or $200 (two shares). Fractional shares allow people to invest the amount they want.

How do fractional shares work?

With fractional share investing, a portion of a share is bought and sold like a full share through brokers that offer this functionality. If you end up with a fractional share due to a stock split, it can be sold along with other shares.

Do you get dividends on fractional shares?

A fractional share entitles the owner to a prorated dividend. For example, if a company pays a $0.30 dividend each year and you own 0.5 shares, you’ll receive a $0.15 yearly dividend. The percent of the fractional share you own entitles you to that percentage of the full share dividend.

Do you get voting rights on fractional shares?

Voting rights in the company are based on full shares. Therefore, one voting right is given for each eligible full share. Voting rights are not offered on fractional shares, since they are less than a full share. If you accumulate enough fractional shares to make a full share, then a voting right is provided on the full share. However, in general, not all shares have voting rights, as companies may issue some shares with voting rights and some without.

Powerful trading on the go

Seamlessly open and close trades, track your progress and set up alerts

Our Next Generation trading platform allows traders to spread bet and trade CFDs on over 8000 shares and ETFs, some of which may be qualified for a stock split in the future. Read our corporate actions​ guide to understand how stock splits have an effect on your open spread bet and CFD share positions.

Famous stock splits

There have been many famous stock splits in recent history, including large companies such as Apple, Tesla and Amazon. For example, in 2020, Apple had a 4/1 stock split. This coincided with a short-term top in the share price. The price fell more than 20% after the stock split but recovered the loss over the following several months.

One company with a large number of stock splits is Walmart, which has had 11 stock splits in its history. The latest one occurred in 1999. Following this split, the stock moved sideways for the next five months before moving definitively back to the upside.

Are stock splits good for investors?

Stock splits should theoretically have no effect on how a stock perform, since there is no change in value. However, if this was true, then companies would not decide to make a stock split. One benefit to investors of a stock split is that the stock price is reduced and becomes more attractive to a wider audience, which may, over time, boost performance. However, reverse stocks splits are often not as beneficial unless the company can do something about why their stock was dropping so much in the first place.

A drawback to a stock split is if the company is already unpopular and the process is seen as an unnecessary attempt to boost the stock’s performance. These types of actions cost money as they require board approval, filing paperwork and lawyer fees.

Stock split news

Stock splits are often announced beforehand or can be predicted by investors that are monitoring a company’s share price that is unusually high. For up-to-date news on shares and the stock market, our news and analysis section provides daily coverage inside the Next Generation platform. For individual stock coverage, live account users also have access to Reuters news feed, analyst insights and Morningstar research reports. After registering for an account, you can find these exclusive resources on the News & Analysis tab. You can also monitor our economic calendar for regular updates.

How to buy fractional shares

Fractional shares are purchased and sold through participating brokers. While trading in fractional shares is gaining some popularity, most traders, investors and brokers still deal in full shares. Fractional shares are useful for very small accounts but are not often a major consideration for traders putting more than a few hundred dollars into most stock transactions.

Summary

In summary, stock splits can be beneficial for companies that are looking for their shares to be more accessible, without the hefty price tag. You can practise your share trading strategies by opening an account to spread bet or trade CFDs on more than 8000 shares and ETFs on our advanced platform. In particular, spread betting is tax-free in the UK*, although there are still costs associated, such as commissions and overnight fees. Read more about our trading costs here. It is particularly important to understand how corporate actions have an effect on your spread bet and CFD positions.

Regardless of whether your positions end up as fractional shares or remain as full-size equity shares, risk-management is important for every trade. Two risk-management techniques that traders and investors often use are stop-losses and position sizing. A stop-loss is an order instruction to exit if the trade goes the wrong way by a certain amount. It makes sure that losses are capped and they do not continue running. Position sizing involves monitoring how much of your total capital is put into each stock, as it is considered less risky to spread it out over more trades. This way, even if one stock drops in value, the whole account isn’t tied to that position.


*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Join over 90,000 other committed traders

1

Apply for a live account

Complete our straightforward application form and verify your account

2

Fund your account

Deposit easily via debit card, bank transfer or PayPal

3

Find and trade

One touch, instant trading available on 11,000 instruments