If you’ve recently gotten into trading, you’ve probably come across the term stock split. A stock split happens when a public company increases the number of its outstanding shares by dividing each existing share into multiple new shares. This way, a lower price per share allows more investors to buy stocks. In this article, you’ll learn more about how stock splits work, what a reverse split stock is, and what to pay attention to when trading.
What is a stock split and how do stock splits work?
In a stock split, each existing share is divided into multiple new shares. Usually, the split is 2-for-1, 3-for-1, or even 10-for-1. For example, one of the recent cases that happened in mid-2024 was when the chip producer NVIDIA did a 10-for-1 stock split.
Let’s say your one stock is worth $100. If you split it into 10, the stock is now worth $10, but the value remains the same because you have 10 times more shares. So the price drops, but the value remains. This way, shareholders end up with more shares, but the total value of their holdings remains the same.
Usually, companies announce the splits some days or even weeks in advance. To keep track of all the new events, you can install trading software with a news feature. You can do it more easily using VPS hosting.
Why Do Companies Split Stock?
A frequent reason for a stock split is to make shares more affordable and accessible to more investors. It usually happens when a company receives a lot of attention from investors and its initial price per share starts to climb. By splitting the stock, the company increases its liquidity, attracts more investors, and gives the opportunity to invest for traders with smaller investment budgets.
For example, as mentioned in NVIDIA’s case, before the stock split, the company’s stock was priced at around $1200 per share. After the split, one share cost only $120, allowing more people to participate and for the company to keep its stock price in an optimal trading range.
Types of Stock Splits: Regular and Reverse
Regular stock splits increase the number of shares and decrease the price per share. Reverse splits, on the other hand, reduce the number of outstanding shares and increase the share price. Most companies go for 1-for-5 or 1-for-10, but it can reach as high as 1-for-100. Reverse splits are often used by companies to avoid delisting from stock exchanges or to appeal to investors who have minimum share price requirements.
Usually, a reverse split tends to show that the company isn’t doing that well. Let’s say a single stock of company Y costs $1. If they do a 1-for-10 reverse split, it would then cost $10. While the value of the company would remain the same, the higher stock price might seem more appealing to investors.
Famous Stock Splits: Case Studies
As mentioned before, NVIDIA was one of the biggest recent stock split examples. Other big companies have also undergone stock splits. For example, Apple has had several stock splits, including a 7-for-1 split in 2014 and a 4-for-1 split in 2020. Tesla executed a 3-for-1 split in 2022. Amazon had a 20-for-1 split in 2022. These splits were generally well-received by the market and made the stocks more accessible to retail investors. To this day, most of these companies remain popular among investors.
Some examples of reverse stock splits would be Innovative Eyewear Inc (LUCY), which went 1-for-20, or Alzamend Neuro Inc (ALZN) which went 1-for-10 in 2024.
FAQ
What is a 10-for-1 stock split?
A 10-for-1 stock split is when a company divides each existing share into 10 new shares to lower the price per share. For example, if you owned 1 share worth $1000 before the split, you would own 10 shares worth $100 each after the split. Your total holding value would be the same – $1000.
Is a stock split good or bad?
Stock splits are generally considered neutral or positive. They don’t inherently change a company’s value or an investor’s holdings. However, they can be seen as a positive signal of growth and can make shares more accessible to smaller investors.
On the other hand, a reverse split tends to indicate that a company isn’t doing very well. But again, both scenarios can be part of successful investment strategies, depending on what your goals are. What’s more important is having a clear investment strategy, such as analyzing trading chart patterns, instead of relying on stock splits.
What happens when a stock splits?
When a stock splits, the number of outstanding shares increases while the price per share decreases proportionately. Shareholders receive additional shares for each share they own, but the total value of their holdings remains the same.
What is a reverse stock split?
A reverse stock split is the opposite of a regular stock split. It reduces the number of outstanding shares while increasing the share price proportionately. For example, in a 1-for-10 reverse split, every 10 shares are combined into 1 new share, and the share price is multiplied by 10.
