How to Be Sure a Stock Split Works in Your Favor
Stock Split Defined
A stock split (or “forward stock split”) occurs when a corporation’s board of directors divides its stock and increases the total number of shares using a particular basis (2-for-1, 4-for-1, etc). It means that a single share represents a smaller portion of ownership in the company–each resulting share is lower in market value. It also means that a shareholder at the time of the split, when the stock exchange changes the share price, will own more shares.
If a company originally had 5,000 shares, it would have 10,000 shares after a 2-for-1 stock split.
EXAMPLE: Apple Stock Split History
For example, Apple (AAPL) has had five stock splits since it went public in 1980. This is a large number of stock splits for stock market history.
- 4-for-1 basis on August 28, 2020
- 7-for-1 basis on June 9, 2014
- 2-for-1 basis on February 28, 2005
- 2-for-1 basis on June 21, 2000
- 2-for-1 basis on June 16, 1987
For comparison, Disney has split its stock 7 times: July 9, 1998: a 3-for-1 split. May 15, 1992: a 4-for-1 split. March 5, 1986: a 4-for-1 split.
Looking at the Apple stock split history from start to finish, an original position size of 1000 shares would be approximately 22,4000 shares today.
EXAMPLE: Amazon Stock Split History
Amazon.com (AMZN) has had four splits in its history.
AMZN’s first split took place on June 02, 1998. This was a 2 for 1 split.
AMZN’s second split took place on January 05, 1999. This was a 3 for 1 split.
AMZN’s third split took place on September 02, 1999. This was a 2 for 1 split.
AMZN’s fourth split took place on June 06, 2022. This was a 20 for 1 split.
Pros and Cons
Generally a corporation will split its stock when its share price is very high (especially in the views of many investors). This was the case with Apple. A lower share price can be more appealing and can rally more investors to invest. If Apple had not ever split its stock, a single share would have been worth around $1,800 in 2021: not an easy dollar amount for many investors to deal with or manage.
In a stock split, the company’s market cap does not change, but it CAN be influenced in a positive way.
It’s crucial to understand, especially for new investors, that stock splits don’t necessarily make a company’s shares a better buy than BEFORE the split. The stock is “cheaper,” but that is it.
When a corporation splits its stock, the corporation’s market capitalization does not change. That said, a split can influence more investors to invest, so it can indirectly affect market capitalization in a positive direction. Any calculations involving shares, like earnings per share, is affected. Earnings per share will now reflect the same calculation as the split (in a 2-for-1 split, if eps were $10/share, it would then be $5/share).
Is a Stock Split a Good Sign?
Stock splits are generally a good sign: a company’s stock has risen in price substantially and the company’s Board of Directors has given it a vote of confidence. There are other extremely important, compelling reasons as an investor you should be interested in splits.
Note that a company can also simply use a stock split as an excuse to attract investors by achieving a similar stock price to the other companies within a sector. Be sure to do your due diligence to make sure this is not the case.
According to Nasdaq data, announcing a stock split gave an average boost of 2.5% to a stock.
After one year, the average stock outperformed almost 5%.
According to data from Nasdaq for 56 large cap stock splits from 2012 to 2018, simply announcing a stock split gave an average boost of 2.5% to a stock. After one year, the average stock outperformed almost 5%.
Also, splits result in smaller spreads between bid and ask (by basic math, smaller numbers generally mean a smaller gap). This is another plus in trading a stock or ETF post-split.
What is Cash in Lieu?
EXAMPLE: schb stock split
See above for the schb split example for a Cash in Lieu. Cash in Lieu refers to a company’s option to give cash for fractional shares created by a split. In the example above (schb stock split) with Schwab US Broad Market ETF (SCHB), I was given cash instead of a fractional share.
Cash is King? A fractional share is defined as less than one full share of equity. These shares may be the result of stock splits, contributions to dividend reinvestment plans (DRIPs), or a myriad of other corporate events. Typically, fractional shares aren’t available to buy as such in the stock market, so they are difficult to sell.
If you ARE able to sell your fractional shares, here’s how it works: Fractional shares should receive the same execution price as your whole shares. So be sure to include your fractional shares in any sell order, whenever possible. Including the whole and fractional share amounts in a trade is crucial.
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How Does a Reverse Stock Split Work?
You can think of a reverse stock split as the converse of a stock split (overall share count will decrease). A 1-for-2 reverse split means every share is now worth double. A company might do this in order to increase their share price and remain competitive in the market.
EXAMPLE: General Electric GE Reverse Stock Split
As mentioned above, a reverse stock split is defined as a company reducing the number of shares outstanding. The three most common reasons a company would want to do a reverse stock split are:
- To prevent the company from being delisted by the stock exchange
- To UP the share price and (hopefully) enhance the company’s image
- To gain more notice from analysts and large investors, if they are lacking attention
Make a Split Work in Your Favor
To make a split work in your favor, either as an existing shareholder or an investor looking to capitalize on an upward stock price, you need to be and stay informed.
Save the Date: Stock Splits Coming Up
So how do you as an investor make stock splits work for you? To get ahead of the curve and to anticipate and get in on the rally that splits often create, you can use this calendar for Nasdaq stocks. The calendar will inform you of split Announcement Dates, Payable Dates, and Ex-Dates. For example at the time of this post, the calendar lists that Google (Alphabet Inc.) announced in December 2021 that it will be splitting 20-for-1 in July of 2022.
Market Beat also has a calendar for stock splits that covers both Nasdaq and NYSE stocks.
If the share price of a stock you own or follow is getting relatively high, you can set up a Google alert to be notified of any stock split announcements.
For a quick description for different ways to set up an alert, go here.
You can create a Google alert for a company’s stock you want to track for announcements of a split in the future.
If you want to ride the wave of stock splitting as an existing shareholder, you must make sure you are a Shareholder of Record by or before the correct date.
Dates and Terms to Remember
|Record Date||The date a shareholder must own the stock to be eligible to receive additional stock split shares (for forward stock split), or have their number of shares reduced (for reverse stock split).|
To qualify for dividends, you must be a shareholder of record by the Record Date.
|Ex-Date||This is the date the stock starts trading at the new split price.|
|Payable Date||The date on which the new number of shares (and/or cash in lieu) are credited to a shareholder’s account.|
|Buyback||When a company purchases back a portion of their outstanding shares. This reduces the total amount of shares available to trade. A buyback can add to shareholder value and may increase stock price to a higher level.|
What Happens If You Buy Stock…
On or After the Record Date
If you buy shares on or after the stock split Record Date and before the Ex-Date, you will be purchasing shares at the price before the split.
A Note About Dividends
The dividend (that is, the cash payment made periodically by a company) is generally proportionate to reflect the split–total payout will not change after the split.
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Disclaimer: All the information provided above and on this site is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.
Photo by Oksana Taran on Unsplash