The mere mention of a stock split can get an investor's blood rushing. But are they worth all the excitement? It depends on why they happen and what it means to the investor.

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 a similar situation for investors.

What Is a Stock Split?

A stock split is a corporate 澳洲幸运5官ꦓ方开奖结果🍸体彩网:action by a company's board of directors that increases the number of outstanding shares. When it's a forward stock split (we'll discuss the reverse split below), it's accomplished by dividing each share into multiple shares, effectively lowering the stock price.

Forward Stock Split

For🍒ward stock splits are much more common than reverse stock splits. Normally, it’s considered a good thing for a share price to rise. However, sometimes management may fear that the price has gotten so high that it could put investors off buying. To make the share price more accessible, company bosses can artificially deflate it through a forward stock split.

Walmart Inc. (WMT) is among the companies that have engaged in forward stock splits—in fact, many of them in its history. In early 2024, the retail giant’s shares cost almost $182 apiece, prompting management to announce a three-for-one forward stock split. That meant shareholders received an additional two shares for each one they already owned, trebled the number of shares in circulation, and lowered the share price to a more affordable $58.52.

Immediately afterward, the value of existing shareholders' holdings didn’t change. Shareholders went from holding one share worth $175.56 to three shares worth $58.52. However, the share price rose steadily in the months after, reaching almost $80 in the next six months. While the positive economic outlook was a significant part, if not all, of this, the reduced share price also made the stock more accessible to a wider range of traders and investors.

A stock split does nothing immediately to the company's market capitalization. In a two-for-one stock split, each stockholder receives an additional share for each share held while the value of each share is reduced by half. Two shares now equal the original value of one share before the split. Thus, if a company's stock traded at $100 per share before the split, it would trade at $50 per share after the split.

A stock split thus changes nothing about a company's 澳洲幸运5官方开奖结果体彩网:fundamentals.

Common Stock Split Ratios

Stock splits can take many forms, but th✅e most common are two-for-one, three-for-two, and three-for-one. An easy way ❀to determine the new stock price is to divide the previous stock price by the split ratio.

For instance, if a $60 stock undergoes a three-for-two split, the new price would be $40 ($60 ÷ (3/2) = $40).

Reverse Splits

Companies can also carry out a reverse stock split. A one-for-10 split gives you one share for every 10 shares you own.

This is the effect a split would have on the number of shares, 澳洲幸运5官方开奖结果体彩网:share price, anꦦd the m♒arket cap of the company doing the split:

Reasons for Stock Splits

Companies carry out stock splits for several important reasons. The first is psychological. Some澳洲幸运5官方开奖结果体彩网: investors might feel that highe🌱r share prices make the stock unaffordable.

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.

Another reason companies consider stock splits is to increase a stock's liquidity. With a lower price, more shareholders can afford to invest in high-value companies, ultimately groꦿwing the market for that company's stock. Stock▨s that trade above hundreds of dollars per share can result in large bid/ask spreads.

Splits are a good demonstration of how corporate actions and investor behavior don't always align with the 澳洲幸运5官方开奖结果体彩网:efficient market hypothesis.

Advantages for Investors 

There are plenty of arguments over whether 澳洲幸运5官方开奖结果体彩网:stock splits help or hurt 🤪investors. Some say a stock split is a good buying indicator, signaling that the compan♋y's share price is increasing and doing well. This may be true, but a stock split simply has no effect on the fundamental value of the stock and poses no real advantage to investors, especially in an era when retail investors can buy fractional shares.

Nevertheless, investment newsletters often note the positive sentiment surrounding a stock split. Entire publications are devoted to 澳洲幸运5官方开奖结果体彩网:tracking stocks that have split and attempting to profit from their bul💃lish nature.

Example of a Stock Split

The chipmaker Nvidia (NVDA) 澳洲幸运5官方开奖结果体彩网:underwent a 10-for-1 stock split in May 2024. This means that for every🎃 share of Nvidia stock investors owned before the sp🦩lit, they would now hold 10 shares—if an investor had one NVDA share valued at $1,000 before the split, they would have 10 shares at $100 each after the split.

However, the total value of the investor's holdings and the company's market capitalization remain unchanged. Before the split, NVDA's market capitalization stood at just over $2.5 trillion, making it one of the world's most valuable corporations. That figure represents 2.5 billion shares outstanding with a market price of about per share. After the split, there were 25 billion shares, with an initial value of around $100.

This is a good example of how splitting a stock can make it more affordable for everyday investors—the very people who have been signaling their excitement over the stock in the years leading up to NVDA's stock split.

When looking at stock charts, such as NVDA's (see below), most will appear without noting the stock split since the share price is adjusted all the way to a company's IPO to match each split afterward.

The Bottom Line

Stock splits are a common corporate action that can generate excitement but don't inherently change a company's value. While splits can make shares more accessible to smaller investors and potentially increase liquidity, they're essentially a cosmetic change. The total value of an investor's holdings remains the same, as does the company's market capitalization.

Investors should generally focus on a company's fundamental strengths, growth prospects, and overall market conditions rather than viewing stock splits as a primary reason to buy shares. However, splits can sometimes signal management's confidence in future growth, which may warrant further study of a company's potential. As with any investment decision, it's crucial to consider the broader context and not be swayed solely by the occurrence of a stock split.