Publicly traded companies use stock splits to manage the per-share stock price for their investors. During a stock split, the company announces that it will be issuing a certain number of new shares for each existing share. Though this doesn’t directly change the market capitalization of the company as a whole, it does affect the price per share – often substantially.
Understanding how to calculate how many shares you will own after a stock split helps you make sure you are calculating your returns properly. Otherwise, you could think your portfolio performed very poorly when in fact you’ve actually had a fantastic year.
Calculating New Shares After Split
To calculate the number of new shares you will have after a stock split, multiply the number of shares you currently own by the number of new shares being issued for each existing share. For example, say a company that you own 150 shares of is doing a 2-for-1 stock split. Multiply 150 by 2 to find that after the stock split, you’ll own 300 new shares.
Calculating Reverse Stock Splits
Sometimes, companies will perform reverse stock splits, where you end up with fewer shares of stock after the split than you owned before. To calculate a reverse stock split, divide the current number of shares you own in the company by the number of shares that are being converted into each new share.
For example, in a 1-for-3 reverse stock split, you would end up with only one new share for every three shares you previously owned. So, if you owned 300 shares of the company, divide 300 by 3 to find that after the reverse stock split, you would only own 100 new shares.
The Impact of Stock Splits
Typically, the stock price will adjust to the ratio of the stock split. For example, if a company’s stock is trading at $200 per share and it performs a 2-for-1 stock split, each share will be worth roughly $100. As a result, even though you have twice as many shares, each share is only worth half as much, so when it comes to your net worth, the split is a wash.
However, when the per share price comes down, it can seem more affordable to a wider range of investors, which can sometimes increase the demand for the stock and push the price higher. In addition, stock splits increase the liquidity of the stock because there are more shares outstanding after a split.
- If you hold your stock in your brokerage account, the brokerage house will handle all the paperwork associated with either a stock split or a reverse split. You will simply see a change in your holdings.
- If you hold your own certificates and see a significant change in the price of your stock, it might have gone through a forward or reverse split. If the stock price is much higher, before you get excited and sell it to take profits, check with your broker to make sure it hasn't gone through a reverse split, or you may accidentally sell more shares than you own and be forced to buy more stock at the market price to cover the extra shares.
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