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· Posted on
February 21, 2024

What’s a stock split?

Split ups can be tough on the ol' love life. But when it comes to investments, stock splits are actually a win-win.

What's the key learning?

  • A stock split is when a company’s board of directors decides to divide its existing stock into multiple shares.
  • Companies tend to split their stocks to attract new investors by reducing its share price.
  • Stock splits should have no impact on the market values of the companies, but often it drives up the price of the shares.

What’s that? My stocks and I might be splitting up?!

No no! Luckily, unlike regular split ups, a stock split involves way less heartbreak. 

Pinky promise, this will not be a Joe Jonas and Sophie Turner situation.

Stock splits are actually a pretty normal thing for companies to choose to do… and in many cases they make a lot of sense.

What’s a stock split?

A stock split is when a company’s board of directors decides to divide its existing stock into multiple shares. 

For example, let’s say Company X is worth $1,000,000. It has 100,000 shares, meaning each share is worth $10.

And the board of directors decide to do a 2-for-1 split. This is the most common type of split and it means every shareholder gets two shares for each share they currently hold.

Here’s how that would play out:

  • Before share split: You hold 100 shares in the company worth $10 each (100 shares x $10 = $1000 total investment).
  • After share split: You will now hold 200 shares in the company worth $5 each (200 shares x $5 = $1,000)

The price-per-share may have halved in value, but the number of shares you have has doubled, so the value of your investment still stays the same.

It’s the same deal for the company; their price-per-share will likely decrease, but with more shares on the market, the overall market capitalisation of the company stays the same.

Why do companies do stock splits?

Often a company will decide to opt for a stock split if they’re concerned the share price is too high. That’s because a high share price can discourage new investors from getting involved (because they can’t afford to buy a whole share).

Having more shares on issue can also increase liquidity, making it easier for investors to trade shares quickly, and easily. This way investors can buy and sell shares without impacting the share price too much.

Let’s look at Tesla as an example of stock splits IRL. 

Tesla has gone through two stock splits since it listed on the Nasdaq in 2010.

First, in August 2020 Tesla opted for a 5-for-1 split when their stock was trading at close to $2,250 per share.

Probably Elon Musk right before declaring a stock split.

Then in 2022, they went for a 3-for-1 stock split, when the share price was at roughly $900.

While stock splits technically aren’t supposed to have any impact on the market capitalisation of the company engaging in the split, - often it pushes up the share price because a whole set of new investors are now interested.

Okay, but what about if you want to increase your share price? Good question - that’s where reverse stock splits come in.

And over the last few years, we’ve seen a number of other companies do stock splits too, mainly to get newer investors on board:

  • Amazon: June 3, 2022 (20-for-1 split)
  • Alphabet: July 15, 2022 (20-for-1 split)
  • Tesla: August 4, 2022 (3-for-1 split)
  • Nvidia: July 20, 2021 (4-for-1 split)
  • Shopify: June 22, 2022 (10-for-1 split)
  • Apple: August 4, 2020 (4-for-1 split)

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