Stock split

A stock split is a corporate action in which a company multiplies its number of shares outstanding by a fixed ratio, such as 2-for-1 or 4-for-1, and the share price drops by the same factor. Each shareholder owns more shares, but the total value of the position and the company's market capitalization do not change.

How it works

The board approves the split and announces the ratio, a record date and the date shares begin trading on a split-adjusted basis. Some splits also need a shareholder vote to raise the number of authorized shares. On the effective date, brokers credit the extra shares and historical prices, earnings per share, dividends per share and analyst price targets are all adjusted by the ratio. Listed options are adjusted by the Options Clearing Corporation so that contract holders are not harmed.

Why it matters for traders

A split does not change fundamentals, but announcements often draw buying interest. Traders read them as a sign of management confidence after a long run-up, and a lower share price can widen retail participation and make options contracts cheaper in dollar terms. Watch the announcement date and the first split-adjusted trading day, both of which can bring elevated volume. A common trap is comparing unadjusted historical prices on a chart or screener and mistaking the split for a crash.

Example

Apple effected a 4-for-1 split on August 31, 2020. A holder of 100 shares at about $500 before the split held 400 shares at about $125 afterward, still worth about $50,000. Tesla's 5-for-1 split took effect the same day.

For a hypothetical case, Northwind Software (NWSW) trades at $900 with 50 million shares, a $45 billion market cap. After a 3-for-1 split it has 150 million shares at $300, still $45 billion.

FAQ

Does a stock split make a stock cheaper?

Only per share. The value of the whole company and of each shareholder's stake is the same immediately after the split.

What happens to my options after a stock split?

Listed options are adjusted. In a 2-for-1 split, one call with a $100 strike typically becomes two calls with a $50 strike, so the position's economics are preserved.