GameStop Announces 4-for-1 Stock Split Here’s What Investors Need to Know The Motley Fool

This procedure is typically used by companies with low share prices that would like to increase their prices. A company may do this if they are afraid their shares are going to be delisted or as a way of gaining more respectability in the market. Many stock exchanges will delist stocks if they fall below a certain price per share. A reverse stock split reduces a company’s number of shares outstanding. If you owned 10 shares of stock in a company, for example, and the board announced a 1-for-2 reverse stock split, you’d end up with five shares of stock.

The reverse split increased its share price from $4.52 to $45.12 post-split. Existing shareholders were also given six additional shares for each share they owned prior to the stock split. So, an investor who owned 1,000 shares of AAPL before the stock split had 7,000 shares after the stock split. On the other hand, a reverse stock split is often aimed at helping a company meet the minimum requirements to remain listed on an exchange. Lower-priced shares after a split seem to be psychologically more appealing to some investors, even though the company’s fundamental value hasn’t changed.

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This move exemplifies how stock splits can help make high-value stocks more reachable for everyday investors while maintaining the same overall investment value. The chipmaker Nvidia (NVDA) announced a 10-for-1 stock split in May of 2024. Now they have two shares for each one previously held but the stock price is cut by 50% from $40 to $20. The market cap stays the same, doubling the number of shares outstanding to 20 million and simultaneously reducing the stock price by 50% to $20 for a capitalization of $400 million. The company announced this week that it plans to split its stock for the first time in 15 years. This surprising move is sparking renewed interest among investors regarding how the stock split will work and what it means to shareholders.

Retail investors flocked to the game and entertainment-focused retailer, driving its shares into the stratosphere. At one point early last year, the stock had surged more than 7,000% before falling back to earth. He’s researched, written about and practiced investing for nearly two decades. Michael holds a master’s degree in philosophy from The New School for Social Research and an additional master’s degree in Asian classics from St. John’s College.

1. The company thinks that’s too pricey, so the board approves a 2-for-1 stock split.
2. They will still own the same percentage of the company that they did before the split, and their position will be valued at the same dollar amount.
3. For current holders, it’s good to hold more shares of a company but the value doesn’t change.
4. While splits often lead to a brief surge in stock price and trading volume, these effects tend to diminish over time.
5. But consider why the stock price is where it is, and splits seem to also be about the company’s fundamentals, too.

Here are a couple of other stock splits that attracted a lot of attention. This tripled the number of company shares while reducing the value of each by a third. Tesla shares began trading on a split-adjusted basis on Aug. 25, 2022. The mere mention of a stock split can get an investor’s blood rushing.

Do Mutual Funds Split like Individual Stocks?

That said, given the findings of an announcement premium, there might be prospects for taking advantage of mispricings around splits. Some companies issue shares of common stock capital losses divided into two or more classes, although approximately 90% issue only one class. Class A shares can award 10 votes per share compared to Class B shares which have only one vote per share. Ironically, the world’s most legendary value investor, Warren Buffett, is the CEO of the world’s most legendary anti-splitting company, Berkshire Hathaway.

Critics would say this strategy is by no means a time-tested one and is questionably successful at best. Say you have a $100 bill and someone offers you two $50 bills in exchange . Most people won’t get excited over a proposition like this because you still end up with the same amount of money. Stock splits present similar situations for people in the investment industry. Because a stock split doesn’t change the underlying value of your investment, you may not notice any more substantial changes than the number of shares in your investment account.

Calculating the Stock Splits in a Company’s History

A stock split is a decision by a company’s board of directors to increase the number of shares outstanding by issuing more shares to current shareholders. 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 cash flow from financing activities flag for investors, in the long run, it can help a company survive and recover from a rough patch. A forward split is a neutral event in that it doesn’t impact the company’s financial strength, and it doesn’t change an investor’s position in a material way.

It’s accomplished by dividing each share into multiple shares, diminishing its stock price. Therefore, investors should avoid the temptation to buy shares simply because a stock split is on the horizon. It’s important to note that, in recent years, the prospect of a stock split has drummed up excitement among investors, temporarily driving up the share price. Those gains are often fleeting, eventually giving way to business fundamentals and the company’s business performance over the longer term. A quick look at the example provided above shows that the total value of the investment won’t change.

If a company pays dividends, the dividend per share will be adjusted, too, keeping overall dividend payments the same. However, research has consistently shown that stock splits often result in short-term abnormal returns, with companies experiencing an average 2% to 4% increase in value around the split announcement. Another way of saying this is that, on average, following a stock split announcement, the stock to be split tends to be overpriced relative to its fundamental value. This phenomenon, known as the “announcement premium,” has been studied by financial researchers for decades. Mutual funds can undergo splits, but they work differently than individual stock splits and occur less frequently.

How Does a Stock Split Affect You?

While splits may lead to short-term price movements and increased trading, they don’t change a company’s underlying worth or an investor’s proportional ownership. Investors should focus on a company’s fundamental business prospects rather than being swayed by the cosmetic changes of a stock 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 value of each share decreases proportionally.

If a stock price increases too much, the price can become a deterrent to new investors who may not be able to afford a share, though brokers offering fractional shares make this less of an issue. So, the split helps make the shares more affordable for more investors and may help to increase the stock’s liquidity. These reasons for a stock split often have a lot to do with the stock price and technical aspects of trading rather than with the fundamental performance of the business.