The share price would likely increase again as more investors purchase shares, Stivers says, adding that in the long run, current shareholders could see some potential value increases, though perhaps temporary. An investor who owned 1,000 shares of the stock pre-split would have owned 4,000 shares post-split. Apple’s outstanding shares increased to over 15 billion, while the market capitalization continued to fluctuate, rising to over $3 trillion in September 2024. Another disadvantage is a potential increase in the stock’s volatility. Lower-priced shares resulting from a split may attract more speculative trading, potentially leading to greater price shifts.

However, the value of each share would now be half of what the original share was worth prior to the split. Consequently, the total value of your holdings, now two shares, would be equivalent to the value of the original share. Just as a pizza is still a pizza no matter how you slice it, a stock split doesn’t change the fundamentals of a company. For most trading activity, the effect of a stock split is pretty straightforward.

If the short investor closes the position right after the split, they will buy 200 shares in the market for $10 and return them to the lender. When Palo Alto started focusing on platformization a year ago, it told investors this would lead to a temporary slowdown in its revenue growth. That’s because the company offered customers fee-free periods to help them transition away from their existing providers, so they could move more of their stack over to Palo Alto.

What Is a Reverse Stock Split?

A stock split occurs when a company’s board of directors decides to issue more shares to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and reduces the price of each individual share. While the number of outstanding shares changes, the company’s overall market capitalisation and the value of each shareholder’s stake remain the same. A stock split is when a company’s board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder’s stake remains the same.

Next Up In Investing

You should not buy shares of a company based solely on a decision to split the organization’s stock. Instead, you should evaluate the company’s fundamentals and future growth prospects, in addition to evaluating how the shares would fit in with your investment strategy. Such an event can prove positive for a company’s image, generating favorable visibility and therefore drawing investors to the organization. Interestingly enough, there are some famous stock splits which have been even larger. For example, Warren Buffett’s Berkshire Hathaway split its shares 50-for-1 back in 2010. More recently, Chipotle announced in March 2024 that it would go forward with a 50-for-1 stock split.

Stock Splits: How They Work and Why They Happen

A stock split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to smaller investors and provide greater marketability and liquidity in the market. Stock splits are corporate actions that alter the number daytrading definition of outstanding shares and their price without changing a company’s fundamental value or market capitalization.

• The main benefit of a stock split is to make a company’s shares cheaper for small investors to buy.
• The frequency of stock splits has decreased significantly since the late 1990s.
• If a company is going to perform well, it will before or after a split.
• For example, when a company decides to split its shares in order to make shares more affordable, it can have a positive effect.
• More often than not, a reverse split involves a company that trades in the over-the-counter markets (OTC).

Any gains will likely be temporary if the underlying business fundamentals don’t support the optimism generated. When a high-quality company creates a significant amount of value, its stock price can soar into the hundreds, or even thousands, of dollars. That makes the stock a little expensive for retail investors, which leaves the majority of shares in the hands of institutions and large investment funds.

NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and fxpro review other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.

As always, investors shouldn’t buy the stock after a dividend record date in the hopes of receiving the related dividend. The same is also true of options, which give holders the right to buy or sell a stock at a pre-determined price within a certain period of time. As fractional investing becomes more popular and widespread, some experts speculate that stock splits will become less important as fractional shares allow you to buy into a company at virtually any price point. This helps ensure more people can access the shares and keeps existing shares liquid. While a reverse stock split is often thought of as a red flag for investors, in the long run, it can help a company survive and recover from a rough patch.

Daniel has 10+ years of experience reporting on investments and personal finance for outlets like AARP Bulletin and Exceptional magazine, in addition to being a column writer for Fatherly. If the stock undergoes a two-for-one split before the shares are returned, it simply means that the number of shares in the market will double along with the number of shares that need to be returned. While none of these suggest entirely rational decisions by traders, a more prosaic and far less flattering depiction of investors is just that they don’t do math well. For this reason, some may struggle to adjust their valuation models properly for the new share structure enough to produce the anomaly. If we assume the company will be successful in meeting that goal, that places its stock at a forward P/S ratio of just 8.3 based on that $15 billion in fiscal 2030 revenue. That means its stock will have to nearly double over the next five or six years just to trade in line with its current P/S ratio of 16.4.

Although stock splits are generally bullish—at least in the short term—the company’s fundamental performance over time is what will determine the future value of each share. So if you’re looking to invest in a stock that’s about to split, remember to base your decision on the company’s overall health and growth prospects and whether it fits with your investing objectives. FTC Solar, Inc. is set to execute a 1-for-10 reverse stock split on November 29, 2024, to comply with Nasdaq’s minimum bid price requirement. This move will reduce the number of outstanding shares from approximately 127.8 million to 12.8 million, impacting all shareholders uniformly.

“If your current stock is valued at $100 per share and there is a 2-for-1 split, you will have two shares worth $50 each,” explains Brian Stivers, investment advisor and founder of Stivers Financial Services. A 3-for-1 stock split means that for every share an investor has, they will now have three shares. The combined value of those three shares would equal the value of what one share used to be. For example, if a stock was valued at $15 and there was a 3-for-1 split, each share would now be worth $5. Receiving more of the additional shares will not result in taxable income under U.S. law. The tax basis of each share owned after the stock split will be half what it was before the split.

However, being aware of split dynamics can provide insight into how market psychology often affects prices. Stock splits are labeled reverse or forward, though when used without an adjective, a forward stock split is usually meant. These occur when a company increases the number of its outstanding shares without changing the overall market capitalization. Each shareholder receives additional shares in proportion to their prior holdings, while the bdswiss forex broker review value of each share decreases proportionally. A stock split is a way for companies to change the per-share price without changing market capitalization. Market capitalization (cap) refers to the total value of a company’s issued stock.