How does a company decide when it is going to split its stock? (2024)

FAQs

How does a company decide when it is going to split its stock? ›

Management of a company might decide to do a forward stock split if they believe the price is relatively "high" or that it is trading outside of an "optimal" range. This decision is made by management based on their subjective views of the historical trading range of the stock and other factors.

There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see a dramatic rise in their stock value consider splitting stock for strategic purposes.

When a stock price gets high, sometimes a public company will want to lower that price and can do that with a stock split. A stock split is a decision by a company's board to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion.

Does it matter to buy before or after a stock split? If you buy a stock before it splits, you'll pay more per share than what it'll cost after it splits. If you're looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.

Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.

Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.

Disadvantages of a Stock Split

A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.

Price Decrease, Increased Liquidity: After a stock split, the price per share typically decreases proportionally to the split ratio (e.g., a 2-for-1 split would halve the price per share). This can make the stock more affordable for retail investors and increase liquidity as more investors can afford to buy the stock.

How did the Berkshire Hathaway Class A shares become so expensive? It was a deliberate strategy by Warren Buffett to keep the number of shareholders low. When most companies increase in value, the corporation will “split” shares - give you two shares for each one you have, cutting the price in half.

How well do stocks do after a split? ›

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.

With a three-for-one stock split, each old share becomes equal to three shares. In turn, the price per share becomes cheaper. So far this year, shares are up more than 11%, outpacing the S&P 500's nearly 7% rise.

“A company will typically do this if a stock price is in the low single digits—such as $3 per share, or $2 per share,” says Dave Heger, senior equity analyst at Edward Jones.

One common belief that investors have regarding stock splits is that a stock's price will go up after a split, but splits do not guarantee that a stock's value will go up. Investors should do additional research and look at the stock's overall financial health.

A 2-for-1 stock split grants you two shares for every one share of a company you own. If you had 100 shares of a company that has decided to split its stock, you'd end up with 200 shares after the split. A 2 for 1 stock split doubles the number of shares you own instantly.

A 10 for 1 stock split means that for each share an investor has, there will now be ten. This overall value of the company will still be the same due to market capitalization. This can be figured out by multiplying the total shares by the price each share is worth.

If they say 5 for 1 then that is done to reduce the price of the stock by issuing five shares for every one share currently available. This is a good type of split.