A stock split occurs when a company board or shareholders decide to increase the number of shares of ownership available. This typically is done to decrease the price of each share to attract more buyers. While a stock split doesn't directly change the value of your stock portfolio, it does change details of your portfolio and can indirectly affect the stock's future value.
The most direct way in which a stock split affects your portfolio is increasing the number of shares you own in a company. If you owned 1,000 shares in "Company A," and it performed a 3-for-1 stock split, you would wind up with 3,000 shares. You would get three shares at the time of the split for each one you owned previously. Psychologically, some shareholders feel a greater sense of ownership when the quantity of shares increases.
Reduced Share Price
The complementary change that results by increasing shares is that each share loses some value. Imagine cutting a pie into six slices and pricing each at $2. If you had no buyers and cut each slice in half to get to 12 slices, the relative worth of each slice would go down because the pieces are smaller. If "Company A" had a pre-split price of $60, the share price would be $20 after a 3-for-1 split. Thus, your 3,000 shares would be worth $20 each, but the total value would remain the same -- $60,000.
In contrast to a straight stock split, a company also can do a reverse stock split. Like a regular stock split, your portfolio value remains the same. The number of stocks is cut with a reverse stock split, and each share is worth more. If "Company A" did a 2-for-1 reverse stock split on your original 1,000 shares, you would end up with 500 shares. If the original price was $60, the new price would be $120.
Stock splits typically are viewed as positive events for a company. Short boosts in share value are common after a split, according to Ruch Duprey of The Motley Fool in his May 2012 article "Will a Stock Split Make Google or Coke More Valuable?" This benefits you if you already own the stock. The duration of the boost varies, and it might have more to do with strong financials that led to the need for the split in the first place, as splits usually occur in rising stocks.
- Hemera Technologies/PhotoObjects.net/Getty Images
- The Differences Between a Stock Split and a Stock Dividend
- How to Calculate the Common Stock Account Balance After a Stock Split
- What Happens to the Value of the Issued Stock When Common Stock Is Redeemed & Canceled?
- How to Calculate the Purchase Price on a Stock Split
- What Is a 3-for-2 Stock Split?
- How Does a Stock Split Work?