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Stock Splits Explained
Written by The Inspired Investor Team | Published on December 10, 2020
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A stock split is a corporate action that increases the number of outstanding shares a company has by issuing more shares to current shareholders. After a stock split, the price of each share is reduced but the value of the company remains the same. The same holds true for the value of the shares you hold. The most common split multiple is 2 for 1, although any multiple is possible.
Why do companies split their shares?
Companies typically split their shares when the stock price has risen significantly. For example, if a company's stock is trading at $1,000 per share and the company undergoes a 2-for-1 stock split, the share price reduces to $500 – making the stock more affordable. Liquidity of shares may increase after a stock split as there will be more shares available on the market.
If a stock split has taken place, when will my account reflect the shares I hold?
It may take up to five business days for the number of shares in your account to be adjusted to the new quantity.
Here's an example: You own 100 shares of Company ABC currently trading at $50 per share. This would mean that prior to a stock split the value of your shares is $5000 (100 shares x $50).
Company ABC undergoes a 2-for-1 stock split. You check your holdings shortly after the execution date and see 100 shares valued at $25 per share. Don't panic. The number of shares in your account will update within five business days to reflect the new number of shares you hold and the price per share (200 shares x $25). The value of your holdings remains the same at $5000.
To learn more, check out What is a Stock Split? in our Investing Academy.
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