Cheat Sheet:
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:
Apple (AAPL)
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).
Tesla (TSLA)
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.