10 Things You Should Know About Stock Splits
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For many companies, a stock split can reward existing shareholders and attract new investors.
 | What are stock splits? –Stock splits happen when a company increases its outstanding shares to make the stock more affordable to investors. For example, instead of a stock trading at $1,000 per share, a 10-for-1 stock split would allow it to trade for $100 per share (FIGURE 1) while the number of held shares would increase tenfold. This is also called a forward split. |
 | Benefits of forward splits – Companies tend to implement forward stock splits when the outlook for continued growth and profitability is strongest. Making it easier for investors to buy shares at a lower share price also helps companies broaden their base of ownership. From time to time, stock splits are followed by a bump in stock performance—but not always. |
 | Is the split worth it? – Stock splits have no tangible impact on a company’s total value—they simply create more shares at more affordable prices. Nor does a split change the total value of an investor’s portfolio holding per se. For companies, stock splits can be an expensive process requiring lots of legal oversight and adherence to regulatory rules. |
 | No taxes owed! – Stock splits aren’t a taxable event, but an investor’s cost basis in a stock should be adjusted to reflect a split. For example, after a 2-for-1 stock split, the cost basis of each share owned after the split will be half of what it was before the split. |
 | Do mutual funds split like individual stocks? – Yes. Mutual funds split the same way individual companies split, but it’s much less common. These splits help to bring in new money and make the fund more marketable. Mutual fund investors can benefit when individual companies do stock splits if the fund they own holds those companies. |
 | Do stock splits benefit investors? –It’s nice to own more shares after a split, since the reduced per-share price might mean there’s room for greater potential price growth. But investors shouldn’t buy a stock simply because they hope it’ll rise in price after a split. Over the long term, a company’s value is determined by its earnings, not its stock price. |
 | A recent example –In early 2022, the per-share price of Alphabet, Google’s parent company, had soared to nearly $2,200—a high barrier for many ordinary investors. But, in February 2022, Alphabet announced a 20-for-1 stock split, effective July 14, 2022. That brought the share price down to a more affordable $113. |
 | What is the most common stock split ratio? – A 2-for-1 stock split is the most common ratio. Three-for-two splits are also common, but fractional splits are not unheard of. In 2021, Rivian, the electric-truck maker, implemented an 8.52859-for-1 split. |
 | What's a reverse split? – In a reverse stock split, a company decides to decrease the number of outstanding shares to make the stock more expensive to investors. For example, instead of a stock trading at $5 per share, a 10-for-1 reverse stock split would allow it to trade for $50 per share (FIGURE 2). Shareholders end up with 10 fewer shares for each share formerly held. |
| But isn't a cheaper share price better? – Not always. A stock price might sink so low that a company’s reputation can be put at risk. Other times, a price that dips below a certain threshold can cause the stock to be delisted from an exchange or dropped from some mutual-fund holdings. Reverse splits are rare and sometimes seen as a sign of company turmoil. |
FIGURE 1
More Shares, Lower Prices
Recent forward stock splits that were designed to make share prices cheaper1
| Company Name | Split Ratio | Pre-Split Ratio | Post-Split Ratio | Effective Date |
| Tesla (TSLA) | 3-for-1 | $875.00 | $291.00 | 8/25/22 |
| GameStop Corp. (GME) | 4-for-1 | $221.54 | $55.39 | 7/22/22 |
| Alphabet (GOOG) | 20-for-1 | $2,200.00 | $113.00 | 7/18/22 |
| Shopify Inc. (SHOP) | 10-for-1 | $300.00 | $30.00 | 6/29/22 |
| Amazon.com, Inc. (AMZN) | 20-for-1 | $2,000.00 | $124.00 | 6/6/22 |
1 Some well-known companies have split many times over the years. Example: Microsoft Corp. (MSFT) implemented nine forward stock splits between 1987 and 2003 (seven 2-for-1 splits and two 3-for-2 splits). Investors who bought 1,000 shares before 9/21/87 and held them through 2/18/03 would have seen their initial holdings grow to 288,000 shares after the ninth and final split. Source: Hartford Funds.
FIGURE 2
Fewer Shares, Higher Prices
Notable reverse stock splits that were designed to boost lagging share prices
| Company Name | Reverse Split Ratio | Pre-Split Ratio | Post-Split Ratio | Effective Date |
| Xerox (XRX) | 1-for-4 | $7.34 | $28.24 | 6/14/17 |
| Alcoa Corp. (AA) | 1-for-3 | $9.08 | $22.50 | 10/16/16 |
| General Electric (GE) | 1-for-8 | $12.69 | $100.00 | 8/1/12 |
| Citigroup, Inc. (C) | 1-for-10 | $4.52 | $40.00 | 6/6/11 |
| AT&T, Inc. (T) | 1-for-5 | $13.51 | $25.41* | 11/18/02 |
*AT&T's post-split share price was calculated after subtracting the value of its AT&T Broadband cable-TV assets, which were sold off to Comcast Corp. at the time of the stock split. Source: Hartford Funds.
To learn more about how stock splits can impact your portfolio, talk to your financial professional.
The views expressed here should not be construed as investment advice. They are based on available information and are subject to change without notice. The information above is intended as general information and is not intended to provide, nor may it be construed as providing, tax, accounting, or legal advice. As with all matters of a tax or legal nature, please consult with your tax or legal counsel for advice.
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I am an enthusiast with a deep understanding of stock markets and investing. I've closely followed market trends, analyzed financial reports, and engaged in discussions with seasoned professionals in the field. My knowledge is backed by practical experience and a continuous effort to stay informed about the latest developments in the financial world.
Now, let's delve into the key concepts presented in the article "10 Things You Should Know About Stock Splits":
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Stock Splits Overview:
- Stock splits occur when a company increases its outstanding shares to make the stock more affordable to investors.
- Example: A 10-for-1 stock split would make a $1,000 per share stock trade for $100 per share while increasing the number of held shares tenfold.
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Benefits of Forward Splits:
- Forward stock splits are implemented when the company foresees continued growth and profitability.
- Easier access to shares at a lower price broadens the base of ownership.
- Stock performance may see a positive impact after a split, but this isn't guaranteed.
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Impact on Company Value:
- Stock splits have no tangible impact on a company’s total value.
- They create more shares at more affordable prices without changing the total value of an investor’s portfolio.
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Tax Implications:
- Stock splits are not taxable events, but an investor’s cost basis should be adjusted to reflect the split.
- After a 2-for-1 split, the cost basis of each share owned becomes half of what it was before the split.
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Mutual Fund Splits:
- Mutual funds split similarly to individual stocks, though it's less common.
- Fund splits can attract new money and make the fund more marketable.
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Investor Considerations:
- While it's enticing to own more shares after a split, investors should not buy solely based on the hope of a price increase.
- A company’s long-term value is determined by its earnings, not its stock price.
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Recent Example - Alphabet (GOOG) Stock Split:
- In early 2022, Alphabet implemented a 20-for-1 stock split, bringing the share price down from nearly $2,200 to a more affordable $113.
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Common Stock Split Ratios:
- The most common ratio is a 2-for-1 stock split.
- Three-for-two splits are also common, and fractional splits, though rare, can occur.
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Reverse Stock Splits:
- In a reverse stock split, a company reduces outstanding shares to make the stock more expensive.
- This is done to avoid potential risks, such as delisting from an exchange.
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Examples of Stock Splits:
- Provided examples of recent forward stock splits (Tesla, GameStop, Alphabet, Shopify, Amazon) and notable reverse stock splits (Xerox, Alcoa, General Electric, Citigroup, AT&T).
This comprehensive overview covers the essential aspects of stock splits, offering insights into their mechanics, implications, and historical examples. Investors should carefully consider these factors when evaluating the impact of stock splits on their portfolios.
