- A forward stock split divides up the company into more shares, so each share is more affordable.
- The overall company’s value doesn’t change, nor does the total dollar amount of stock you own (it does not create a gain or loss for the investor).
- Stock splits are decided by the company’s board of directors.
- To be eligible, shares must be purchased before the stock’s split effective date.
- Splitting of fractional shares is up to the brokerage. Fractional shares held with Stockpile will be split.
Owning 1 share of stock worth $50 is the same thing as owning 2 shares worth $25 apiece, right? A forward stock split divides the company into more shares so that each share is more affordable.
In a 2-for-1 stock split, the company doubles the number of shares, and each one is worth half as much.
Examples with recent notable forward stock splits:
Split Ratio: 4-for-1
Effective Date: 8/31/20
For example, if you own or purchase 100 shares of AAPL (before the effective date of 8/31/20) trading at $400 per share (total investment value $40,000), after the split on 8/31/20, you will own 400 (4 x 100) shares valued at $100 ($400 / 4) per share(total investment value is still $40,000).
Split Ratio: 5-for-1
Effective Date: 8/31/20
For example, if you own or purchase 100 shares of TSLA (before the effective date of 8/31/20) trading at $1,500 per share (total investment value $150,000), on 8/31/20, you will own 500 shares valued at $300 per share(total investment value is still $150,000).
Historical Example of stock split (AAPL):
Apple did a 7-for-1 split in June 2014. Its stock was trading at about $645 per share before the split, which made it unaffordable for the average investor. After the split, the stock traded at about $92 per share, which made it more affordable for people to own Apple stock.
In fact, Apple has split its stock four times since its IPO in 1980:
- 7-for-1 in June 2014
- 2-for-1 in February 2005
- 2-for-1 in June 2000
- 2-for-1 in June 1987
To compare Apple’s stock price today with its stock price in the past, you need to account for these splits. Otherwise, it wouldn’t be a fair comparison. When Apple went public in 1980, its stock price was $22 a share. To compare that to today’s price, you need to divide by 56 to adjust for all the splits (2 x 2 x 2 x 7 = 56). $22 divided by 56 = 39 cents, which means a share worth $150 today would have cost only 39 cents back in 1980. Amazing, huh? That’s how well Apple stock has done over the years!
Important things to note:
- Stock splits happen automatically, and no action needs to be taken by the investor. There are no fees associated with stock splits.
- Splitting of fractional shares is dependent on the brokerages the shares are being held at.
- Stock splits themselves do not make a company more or less valuable. However, investors interpret them in different ways, and it can potentially affect the stock price in the short-term.