Is a Stock Split Good or Bad for Investors?

A stock split is a corporate action where a company decides to increase the number of its outstanding shares. The company issues additional shares to existing shareholders.

The main objective of a stock split is to make shares more affordable to small investors who couldn’t buy the shares earlier due to higher prices. A company splits its stock to increase liquidity. Is a stock split good or bad for investors?

A stock split is when a company increases the number of outstanding shares to boost the stock’s liquidity. The most common stock split ratios are 2-for-1 or 3-for-1. In a 3-for-1 stock split, the shareholder will receive three shares for each share held. If there were 5,000 outstanding shares before the split, there would be 15,000 shares after the split.

Although the number of outstanding shares jumps by a specific multiple, the total dollar value of the shares remains constant. The split doesn’t add any real value. As the number of shares outstanding increases, the stock price per share decreases. In a 2-for-1 stock split, the stock price per share will be halved.

Stock splits are good for investors. Existing shareholders receive additional shares without incurring any extra cost. However, this doesn’t mean that the value of your holding has increased. A stock split is especially beneficial for retail investors who can buy a large number of shares in blue-chip firms, which would have been very expensive.

A stock split decreases the value of a single stock, which makes it easier for retail investors to buy the stock. A stock split may increase the stock’s overall volatility because the shares will be easier to trade. Also, a stock split may lead to risks if the stock price falls too much after the split.

In August 2020, Tesla split its shares 5-for-1 to make it more affordable to small investors. Right before the stock split, each share was trading at around $2,200. After the split, the price per share at the market open was about $440. Existing shareholders were given five shares for each share owned, so an investor who owned 5,000 shares of Tesla pre-split would have 25,000 shares post-split.

On Nov. 16, the S&P Dow Jones Indices announced that Tesla stock will be added to the S&P 500 Index on Dec. 21. Based on the closing prices on Nov. 16, the electric vehicle maker would be one of the top 10 most valuable companies in the index. Tesla stock is up about 13 percent at $460 in the pre-market trading session on Tuesday, Nov. 17.

In August 2020, Apple split its shares 4-for-1 to make it more accessible to small investors. Right before the stock split, each share was trading at around $500. After the split, the price per share at the market open was about $125. Existing shareholders were given four shares for each share owned. So, an investor who owned 2,000 shares of Apple pre-split would have 8,000 shares after the split. Apple stock has split five times since the company went public.

Amazon stock has split three times since the company went public in 1997. The stock was split 2-for-1 in June 1998, 3-for-1 in January 1999, and 2-for-1 in September 1999.