Stock Splits: What They Are & How They Work

A stock split is literally what it sounds like. If you own 10 shares of a company and they do a “2 for 1 split,” this means after the split, you will own 2 stocks worth half the amount they were worth prior to the split for every one stock you had. You would have […]

A stock split is literally what it sounds like. If you own 10 shares of a company and they do a “2 for 1 split,” this means after the split, you will own 2 stocks worth half the amount they were worth prior to the split for every one stock you had. You would have 20 shares after the split, but your total amount invested would still remain the same.

Let’s use Apple as an example since they recently announced a 4 for 1 split. This means for every one share you owned prior to the split you will have 4 shares after the split. To keep the example simple we will say that one share of apple is $400. If you own one share and then it splits 4 for one like it’s scheduled to do here soon. You will own 4 shares after the split, but each share will be $100 instead of $400. The value of your ownership in apple doesn’t change at all with the split, but the number of shares does.

Companies decide to split their stock from time to time when the price of an individual share becomes high. They do this to keep investing in the stock affordable or within reach for individuals. Say someone invests $300 per month, with a stock priced too high, they won’t be able to invest into that certain stock, but when it’s split down, it makes it accessible again. That’s how it’s supposed to work anyway. 

In reality, now that fractional shares have become a thing, it makes stock splits less relevant for the individual investor.  Fidelity and Schwab now offer stock slices, which is their version of fractional shares. Fractional shares allow you to invest in most companies at any dollar amount vs buying the whole share. 

The physiology of splits hype up the price of the stocks leading up to the split. If you can own 100 shares one day and then overnight you own 400, that seems pretty cool. You have to remember that the dollar amount you own doesn’t change aside from fluctuations in the price of the stock due to this hype leading up to the split. If you’re wondering if you should buy before or after, it doesn’t matter in relation to the split, but more about the excitement of the split. As we’ve seen with Apple, since the announcement of the split, the stock has been going up almost every day.

A reverse split happens when the company is trying to reduce the number of shares existing and create a more balanced and normal share price. They may do this to make the stock look more attractive and keep it from reaching penny stock status or to get it out of being considered a penny stock. Typically anything that trades under $5 is considered a penny stock.

For a visual, reverse splits are the opposite of regular stock splits. If you own 1,000 shares of a company and they do a 1 for 10 split, then you will own 100 shares after the split. Just like with regular splits, the dollar amount you own doesn’t change except for change due to hype of the split. If your 1k shares were worth $1/share before the split, they would be worth $10 each after the split. You would have $1,000 worth of stock prior to the split at $1/share for 1,000 shares or $1,000 worth at $10/share for 100 shares.

With splits and reverse splits, if you don’t know what’s going on, you can be fooled into thinking the value of the company just massively increased or decreased overnight. Sometimes people will use the wrong stock price when looking at historical information too in order to consider long term changes in the price of a stock, so make sure when you are reviewing information like this, that you adjust for stock splits, or make sure the information you’re reading is showing “split-adjusted” prices.

For example, when Apple split in 2014 7 for 1. That meant for every 1 share a person had prior to the split they had 7 after and each price of the individual stock went from $700 down to $100. Think about the fact that Apple was trading at $700 in 2014. That’s pretty nuts, and now just before the most recent split, the stock was trading just around $500. If you don’t consider the split that happened in 2014, then you’d think that the stock is being sold for less now than It was in 2014.

Another thing to know is when you adjust the price of Apple stock’s initial public offering it would have been offered at 32 cents as of a few years ago and I’ll link the source below, but it would probably be even lower as of the most recent split, but you have to know that the stock wasn’t actually offered at this price. It was offered at $22. People get tricked into buying penny stocks (anything under $5) because people say things like, “buying this penny stock is like buying Apple at 32 cents.” Apple was never offered as a penny stock and most reputable companies you see never were either, so don’t get tricked into thinking they were.

It’s easy to look back at what certain stocks have done over time and regret not buying or not buying more, but know you made the best decision for yourself with the information and resources you had available at the time.  I encourage you to think ahead instead of back and try to avoid thinking that you missed out on anything and instead think that 10 years from now you will be glad you got started.

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