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.
Investor Psychology & Behavioral Triggers
Stock splits are often described as “cosmetic” since they don’t change a company’s underlying value or fundamentals. However, history shows that investor psychology frequently drives price movements before and after a split announcement. Understanding these behavioral triggers can help traders and investors make more informed decisions.
1. The “Affordability Effect”
When a company executes a forward stock split, the share price decreases while the number of shares increases proportionally. Even though the market capitalization stays the same, many investors perceive the stock as “cheaper.”
Why It Matters
- A stock trading at $300 can feel “expensive” to retail investors.
- After a 3-for-1 split, the stock trades at $100, making it appear more accessible.
- This perception often leads to increased buying interest from smaller investors, creating short-term upward pressure on price.
Example:
When Apple executed its 4-for-1 stock split in August 2020, the post-split affordability effect helped fuel additional retail demand, despite no fundamental change in the company’s valuation.
2. Signaling Confidence from Management
A stock split announcement often acts as a positive signal from company leadership. Splits are more likely to occur when:
- A company’s share price has risen significantly over time.
- Management believes in the long-term strength of the business.
- The firm wants to broaden its investor base by making shares more attractive to retail traders.
In other words, splits indirectly signal management’s confidence that growth will continue. This “signaling effect” often attracts momentum traders, who interpret the split as a bullish catalyst.
3. The Herd Mentality & FOMO Effect
Stock splits frequently generate media coverage, which naturally draws in more traders and investors. When combined with the perception of affordability, this can create a self-reinforcing cycle:
- Company announces a split → Stock gains media attention.
- Retail investors rush in due to the “cheaper price.”
- Increased demand drives the price higher, confirming bullish sentiment.
- Other investors pile in due to FOMO (Fear of Missing Out).
This is particularly common in tech stocks where retail participation is high.
4. Momentum Amplification Before & After Splits
Historically, many stocks outperform the market in the months leading up to a split announcement. This can be attributed to:
- Pre-split optimism: Investors anticipate stronger future demand.
- Institutional accumulation: Funds may add exposure ahead of the split to capitalize on potential post-split price action.
- Retail momentum: Traders buy based on headline-driven excitement.
After the split, performance can continue short-term but typically stabilizes as fundamentals reassert themselves.
5. When Psychology Backfires
While splits often create a bullish bias, investor psychology can also mislead traders:
- Not all splits indicate strength – sometimes companies split shares simply to maintain index eligibility or broaden liquidity.
- If the fundamentals don’t support continued growth, the price rally may fade quickly.
- Reverse stock splits, in particular, often trigger negative sentiment, as they’re usually associated with struggling companies trying to boost share price artificially.
Historical Data & Split Performance Trends
While stock splits don’t directly change a company’s value, historical data shows that stocks often experience noticeable price trends both before and after splits. Understanding these patterns can help traders set realistic expectations and avoid common misconceptions.
1. Performance Before a Stock Split
Studies consistently show that many companies announcing stock splits have already experienced strong price appreciation in the years leading up to the event. This suggests that splits are often a byproduct of sustained growth, not the cause of it.
Key Insights
- A Bank of America study analyzing over 30 years of stock splits found that:
- On average, stocks gained +28% annually in the five years before a split.
- During the same period, the S&P 500 averaged around +12% annually.
- This outperformance happens because companies usually earn the right to split by achieving significant growth and investor confidence.
Takeaway:
By the time a company announces a split, much of the price momentum has often already occurred.
2. Performance After a Stock Split
Contrary to popular belief, a stock split doesn’t guarantee future gains, but short-term rallies are common – driven by investor psychology, increased retail participation, and media attention.
Historical Data Highlights
- According to the same Bank of America analysis:
- On average, stocks returned +25% in the first 12 months after a split.
- During that same period, the S&P 500 averaged roughly +9%.
- However, over longer timeframes, performance tends to normalize, and split stocks revert closer to broader market returns.
Example:
When Tesla announced its 5-for-1 stock split in August 2020, the stock surged ~80% between announcement and execution, largely driven by retail demand and media buzz. Within a year, however, performance stabilized closer to sector averages.
3. Reverse Stock Splits and Underperformance
While forward splits are generally associated with growth, reverse stock splits often paint a different picture.
These occur when a company reduces its share count to artificially increase its stock price, usually to avoid delisting or improve market perception.
Historical Trends
- On average, stocks undergoing reverse splits underperform significantly over the following 12–24 months.
- Many companies executing reverse splits have weak fundamentals or declining earnings, leading to sustained bearish trends.
Key Insight:
For traders, reverse splits are often a warning sign, not a buying opportunity – unless accompanied by strong improvements in business performance.
4. Why Stock Split Performance Patterns Matter
Understanding historical trends helps traders and investors:
- Set realistic expectations – Splits don’t create value by themselves.
- Identify momentum phases – Most upside happens before the split.
- Avoid chasing hype – Late entry after a split announcement often leads to buying at inflated prices.
- Spot potential red flags – Reverse splits often correlate with companies in financial distress.
Quick Reference: Average Stock Split Performance
| Timeline | Avg. Stock Return | S&P 500 Avg. Return | Key Takeaway |
|---|---|---|---|
| 5 Years Before Split | +28% annually | +12% annually | Splits usually follow strong, sustained growth |
| 1 Year After Split | +25% | +9% | Short-term rallies are common, but mostly sentiment-driven |
| 2–3 Years After Split | Near market averages | Market averages | Long-term performance stabilizes |
| Reverse Splits | Typically negative | N/A | Often linked to financial struggles |
Famous Avoiders – Why Some Companies Won’t Split
While many companies embrace stock splits to make shares appear more affordable and attract retail investors, some businesses take the opposite approach and intentionally avoid splitting their stock – even when prices climb into the thousands of dollars per share.
This decision often reflects a strategic philosophy rather than oversight. By keeping share prices high, these companies aim to shape investor behavior, reduce speculation, and attract long-term shareholders.
1. Berkshire Hathaway (BRK.A) – The Most Famous Example
Warren Buffett’s Berkshire Hathaway is perhaps the most iconic case of a company refusing to split its stock.
- Share Price Today: Over $500,000 per share for Class A stock.
- Reason for Avoidance: Buffett believes that high prices discourage short-term trading and attract serious, long-term investors who align with Berkshire’s philosophy.
- Key Quote: Buffett has stated that splitting the stock would “invite people to trade in and out, rather than think like owners.”
Impact on Investors:
- Berkshire’s Class A shares are priced intentionally high to create an ownership mindset.
- For broader accessibility, the company introduced Class B shares (BRK.B), which trade at a fraction of the price but still avoid frequent splitting.
2. NVR Inc. – Keeping Out the Speculators
NVR, a U.S. homebuilding company, also avoids stock splits, with share prices often exceeding $7,000.
Why They Avoid Splitting:
- By maintaining a high stock price, NVR reduces retail speculation and minimizes volatility.
- The company prefers attracting institutional investors with a longer-term horizon rather than day traders seeking quick gains.
This approach has helped NVR maintain steadier price movements compared to many competitors in the same sector.
3. Seaboard Corporation – A Quiet Giant
Seaboard Corp, an agriculture and transportation conglomerate, trades above $3,000 per share and has historically avoided stock splits.
Strategic Reasoning:
- Like Berkshire, Seaboard uses a high stock price to limit unnecessary trading activity.
- The company focuses on attracting investors who understand its long-term value rather than those influenced by price psychology.
4. Why Companies Choose Not to Split
Firms that avoid stock splits often share a few common motivations:
| Reason | Impact on Investors |
|---|---|
| Encourage Long-Term Ownership | Discourages speculative, short-term trading. |
| Attract Serious Investors | High prices appeal to institutional investors rather than retail “price-chasers.” |
| Reduce Volatility | Fewer small trades reduce short-term price swings. |
| Reinforce Brand Prestige | A five- or six-figure share price creates a perception of exclusivity. |
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.
