# What a Stock Split Is, Why Companies Do It, and How It Works, With an Example

![Stock Split](https://www.investopedia.com/thmb/luHua_bmuVno_pDP1CMUF660_Cc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Stock_Split-8d5689ee251843ce9d2dc5999491079b.jpg)

*— Investopedia / Lara Antal*

> **Definition**
>
> A stock split is a corporate action that increases the number of shares in the market by splitting the outstanding stock. This boosts liquidity and decreases its stock price.

## What Is a Stock Split?

A stock split happens when a company divides its stock into multiple shares, effectively lowering the price of each share without changing the company's market value. It's akin to cutting a cake into smaller slices; you end up with more pieces, but the total amount stays the same. For instance, in a two-for-one split, an investor who owned one share priced at $100 would end up with two shares, each worth $50 but with the same total value.

### Key Takeaways

*   Through a stock split, a company increases the number of its outstanding shares to boost the stock's liquidity.
*   Although the number of shares outstanding increases, there is no change to the company's total market capitalization as the price of each share is split as well.
*   The most common split ratios are two-for-one or three-for-one, which means every share before the split will turn into multiple shares afterward.
*   Reverse stock splits are the opposite, in which a company lowers the number of shares outstanding to raise its stock price.

This can increase [liquidity](https://www.investopedia.com/articles/basics/07/liquidity.asp) (the ability to trade the stock easily) and trading volume. However, a stock split doesn't change the company's value—it simply redistributes ownership into smaller, more affordable units. In addition, some argue that in the age of fractional shares and when so much investing is done by institutions that just look at the total value invested, not the share price, stock splits are becoming obsolete. However, stock splits are still used by companies to make their shares appear more attainable to retail investors. These company actions also tend to signal management's confidence in future growth.

Below, we'll explore more about why companies choose this strategy, the mystery behind why the stock's value tends to go up (even as it shouldn't), how this change affects various stakeholders, and what investors should consider when a stock split occurs. 

> **Tip**
>
> When examining historical stock charts, be cautious since many platforms (but not company investor sites) automatically adjust the historical prices backward for stock splits. This means a stock that traded at $1,000 on a specific day historically before a 10-for-one split might show up as $100 in the historical data. Always check if prices are split-adjusted to avoid misinterpreting long-term price trends.

## Forward Stock Splits

Stock splits are labeled [reverse](https://www.investopedia.com/terms/r/reversesplit.asp) 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.  

## How Stock Splits Work

The main characteristic of a forward stock split is the increase in the number of shares available in the market. For instance, in a two-for-one split, each share is divided into two, doubling the number of outstanding shares. Similarly, a three-for-one split would triple the number of shares.

Along with this increase in share count, the price per share is adjusted downward in line with the split ratio. Thus, if a company carries out a two-for-one split, a share priced at $100 before the split would be priced at $50 afterward. A $90 share would be $30 post-split in a three-for-one split.

Despite these changes, the total value of an investor's holdings remains constant. The decrease in the price per share precisely offsets the increase in the number of shares. This principle extends to the company's [market capitalization](https://www.investopedia.com/investing/market-capitalization-defined/), which remains unchanged before and after the split (except for market shifts). The total value of shares held by all shareholders should stay the same, maintaining the company's market value.

When a company performs a forward stock split, the process is seamless for shareholders. The additional shares are automatically credited to shareholders' accounts by their brokers.

While a stock split doesn't inherently change a company's value, it can affect market perception and liquidity. The lower share prices resulting from a split may make the stock more accessible to smaller investors, potentially broadening the shareholder base. In addition, the increased number of shares can improve liquidity in the market, making it easier for investors to buy or sell the stock.

## Why Do Companies Split Their Stocks?

In a perfectly efficient market, a stock split shouldn't impact a company's total market value or an investor's wealth. The total market capitalization, individual ownership stakes, and fundamental value of the company are unchanged. It's often compared with cutting a pizza into smaller slices—you have more pieces, but not more pizza.

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.

> **Fast Fact**
>
> For reverse splits, researchers have found the opposite of the announcement premium of forward splits: the stock price tends to fall below fundamental value in the short-term.)

Several overlapping explanations have been proposed:

1.  **The best trading range**: Companies split their stock to keep the share price within a perceived best range that balances the needs of different investor types. That is, specific prices might appear strange or outlandish to investors.
2.  **Lower prices attract more investors**: A lower post-split price is more accessible to retail investors.
3.  **Liquidity hypothesis**: As we've seen, many argue that stocks trading at lower prices after a split are more liquid, attracting more investors and increasing trading volume.
4.  **Signaling theory**: Stock splits serve as a signal from company insiders of positive prospects. Executives might be indicating their expectations of continued growth and rising stock prices.
5.  **Attention hypothesis**: Stock splits may attract media and analyst attention, increasing visibility and potentially driving demand for the stock.
6.  **Tick size hypothesis**: In markets with fixed minimum price increments, i.e., [ticks](https://www.investopedia.com/terms/t/tick-size.asp), splits can effectively increase the relative tick size, potentially benefiting market makers and improving liquidity.  
    

> **Tip**
>
> Stock splits can affect option contracts. When a stock splits, the option's strike price and number of contracts are usually adjusted to maintain the same total value. If you're holding options during a stock split, you should carefully review how your contracts are affected.

## Investor Stock Price Preferences

Studies have long shown that investors prefer specific nominal price ranges, which companies may be catering to through splits. This research, which has included surveys of investors, has found that investors generally prefer stock prices from $10 to $50 per share. However, these preferences vary across different markets and periods. Here's a summary of findings that relate to this:

1.  **Stocks can be priced too low**: There's often resistance to prices below $5, as some institutional investors have policies against buying "[penny stocks](https://www.investopedia.com/terms/p/pennystock.asp)" (generally defined as stocks trading below $5).
2.  **Stocks can seem too pricey**: Prices above $100 are often seen as "too expensive" by retail investors, even though this is not necessarily related to the stock's fundamental value.
3.  **Historical consistency**: The average nominal share price on the New York Stock Exchange remained remarkably constant at around $30 to $40 from the 1930s to the 2000s, suggesting a long-term preference for this range.
4.  **Market differences**: The preferred range varies by market. For example, in some Asian markets, lower nominal prices (even below $1) are more common and accepted.
5.  **Recent trends**: With the rise of fractional share investing, some companies have allowed their share prices to rise well above $1,000 without splitting. However, many companies still aim for the traditional $20-$50 range.
6.  **Post-split target**: When companies split their stocks, they often aim for a post-split price in the $30-$50 range.
8.  **Reverse splits**: Companies often carry out reverse splits to bring their share price above $5 or $10, avoiding delisting and improving institutional investors' perceptions.  
    

## Behavioral Finance Explanations

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. This relates to the concept of "nominal price illusion"—like the "[money illusion](https://www.investopedia.com/terms/m/money_illusion.asp)"—that investors have a cognitive bias to see lower-priced shares as more of a value, no matter that there's no change in the stock's fundamentals.

These preferences aren't rational in a purely economic sense, as the [nominal](https://www.investopedia.com/terms/n/nominal.asp) share price shouldn't matter. Behavioral finance researchers have been particularly interested in the stock split anomaly since it challenges the [efficient market hypothesis](https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp).

> **Fast Fact**
>
> Behavioral finance asserts that people often make financial decisions based on emotions and cognitive biases rather than being rational in their trading decisions. For instance, loss aversion means that investors often hold losing positions rather than feel the pain of taking a loss.

In addition to a slight boost between the announcement and the split, researchers have generally found "post-split drift," with "drift" being a term used for this and other events. This refers to how, after a significant corporate event (stock splits and other company announcements), there's still an effect even though, all things being equal, there shouldn't be. This drift for forward stock splits means a slight bump in stock prices afterward. Traders and experts have wanted to understand why.

Specialists in behavioral finance have argued that cognitive biases contribute to the announcement premium:

*   **Anchoring bias**: Investors might anchor to the pre-split price, perceiving the post-split price as "cheaper."
*   **Availability bias**: The increased attention from a split may make the stock more "available" in investors' minds, potentially driving demand.  
    
*   **"Gambling" preferences**: When a company splits its stock, the lower post-split price can make the shares appear more like a "lottery ticket" to some investors. An investor might feel they have more upside potential owning 100 shares at $20 each than one share at $2000, even though the total investment is the same.
*   **Overconfidence**: Retail investors overestimate their ability to profit from perceived "cheaper" shares post-split.  
    
*   **Representative [heuristic](https://www.investopedia.com/terms/h/heuristics.asp)**: Investors might associate stock splits with successful, growing companies, leading to undue optimism.  
    

While none of these suggest entirely rational decisions by traders, a more prosaic and far less flattering depiction of investors is that they don't do math well. For this reason, some may struggle to adjust their valuation models properly for the new share structure enough to produce the anomaly.  

> **Fast Fact**
>
> The frequency of stock splits has decreased significantly since the late 1990s. This decline coincides with the rise of algorithmic trading, the selling of fractional sales, and the acceptance of such prices by institutional investors.

## Implications for Investors

The first obvious implication to remember is that while stock splits may generate short-term price movements, they do not change a company's underlying value or an investor's percentage ownership. The change should be cosmetic.

That said, given the findings of an announcement premium, there might be prospects for taking advantage of mispricings around splits.

## Reverse Stock Splits

A [reverse stock split](https://www.investopedia.com/terms/r/reversesplit.asp) is when a company reduces its outstanding shares by combining multiple shares into one, resulting in a proportionally higher price per share. This is the opposite of a forward stock split, where a company increases its share count while decreasing the price per share.

Here are the most important characteristics of a reverse split:

*   **Decrease in outstanding shares**: The primary feature of a reverse split is to lower the total number of shares in circulation.
*   **Higher share price**: Shareholders receive fewer shares than they previously held, but the value of each share increases proportionally.
*   **Unchanged market capitalization**: All things being equal, the company's total market value should remain the same since the increase in share price offsets the reduction in share count.
*   **Ensures compliance with exchange rules**: Often used to increase a stock's price to meet the minimum price major exchanges require for remaining listed.
*   **Negative perceptions**: Reverse splits can sometimes be viewed unfavorably by investors, as they may indicate financial distress or lack of confidence in future growth.

For example, suppose a company with 10 million shares outstanding trading at $5 per share carries out a one-for-five reverse split. In this case, the number of shares will be reduced to 2 million (10 million ÷ 5), with each share priced at about $25 ($5 × 5). However, the company's market capitalization should remain at $50 million ($5 × 10 million = $25 × 2 million).  

> **Tip**
>
> A reverse/forward stock split is a special stock split strategy to eliminate shareholders holding less than a certain number of shares. A reverse/forward stock split consists of a reverse stock split followed by a forward stock split. The reverse split reduces the overall number of shares a shareholder owns, causing some shareholders who hold less than the minimum required by the split to be cashed out. The forward stock split then increases the number of shares owned by the remaining shareholders.

## Key Dates in a Stock Split

In a stock split, there are three pivotal dates that investors should be aware of: the announcement date, the record date, and the distribution date (also known as the effective date).

*   The **announcement date** is when the company publicly declares its intention to split its stock, often causing an immediate market reaction.
*   The **record date** is the day the company determines which shareholders are eligible to receive the additional shares from the split; investors must own the stock before this date to participate in the split.
*   Finally, the **distribution date** is when the new shares are actually issued and begin trading at the post-split price.

While an investor must own shares by the record date to be eligible for the split, shares typically trade at the pre-split price until the distribution date. The time between these dates can vary, but companies usually provide this information in their split announcement to help shareholders and potential investors plan.

> **Fast Fact**
>
> Some successful companies have never split their stock. Berkshire Hathaway's Class A shares (BRK.A) have never been split and traded at over $675,000 per share in September 2024.

## Advantages and Disadvantages of Stock Splits

Advantages

*   Increased liquidity
    
*   Attractive to new investors
    
*   Improved perceived affordability
    
*   Flexibility for investors
    

Disadvantages

*   No change in the company's value
    
*   Potential for increased volatility:
    
*   Costs of doing the split
    
*   Market reaction
    

### Advantages of a Stock Split

Let's summarize the [advantages companies see](https://www.investopedia.com/companies-with-most-stock-splits-8709383) when going through the hassle and expense of a stock split. First, a company often decides on a split when the stock price is relatively high, making it expensive for investors to acquire a standard [board lot](https://www.investopedia.com/terms/b/boardlot.asp) of 100 shares.

Second, the higher number of shares outstanding can result in greater liquidity for the stock, which facilitates trading and may narrow the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp). Increasing the liquidity of a stock makes trading in the stock easier for buyers and sellers. This can help companies repurchase their shares at a lower cost since their orders will have less impact for a more liquid security.

While a split, in theory, should have no effect on a stock's price, it often results in renewed investor interest, which can positively affect the stock price. While this effect may wane over time, stock splits by [blue-chip](https://www.investopedia.com/terms/b/bluechip.asp) companies are a bullish signal for investors. Some may view a stock split as a company wanting a bigger future runway for growth; for this reason, a stock split generally indicates executive-level confidence in the prospect of a company.

> **Important**
>
> In the U.K., a stock split is called a scrip issue, bonus issue, capitalization issue, or free issue.

### Disadvantages of Stock Splits

However, stock splits have disadvantages. One of the primary drawbacks is the cost involved: legal fees, paperwork, and shareholder communications. These costs can be substantial for smaller companies.

Another disadvantage is a potential increase in the stock's volatility. Lower-priced shares resulting from a split may attract more [speculative](https://www.investopedia.com/terms/s/speculativestock.asp) trading, potentially leading to greater price shifts. This increased volatility is often undesirable for all companies or investors.

There's also a risk that the positive effects of a stock split may be short-lived. While splits often lead to a brief surge in stock price and trading volume, these effects tend to diminish over time. Any gains will likely be temporary if the underlying business [fundamentals](https://www.investopedia.com/terms/f/fundamentals.asp) don't support the optimism generated.

In addition, in an era of [fractional share](https://www.investopedia.com/terms/f/fractionalshare.asp) investing, when investors can buy partial shares, the practical benefits of stock splits for increasing accessibility have been reduced. This seems to have made splits less impactful or necessary.

Lastly, frequent stock splits might be seen as a form of financial engineering rather than a focus on fundamental business growth.

## Example of a Stock Split

In June 2024, Nvidia Corp ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) split its shares ten-for-one. Right before the split, each share was trading at around $ 1,200. After the split, the price per share at market open was about $120 (approximately $1200 ÷ 10). An investor who owned 1,000 shares of the stock before the split would have owned 4,000 shares after the split. Nvidia's [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp) increased to over 24 billion, while its [market capitalization](https://www.investopedia.com/nvidia-usd3-trillion-market-cap-8658929) reached over $3 trillion.

A company may split its stock as many times as it would like. Nvidia has completed six forward splits since its initial public offering (IPO) in January 1999.

> **Tip**
>
> To figure out how many post-split shares come from one original share, you multiply the ratios of each split together. For example, when Nvidia executed a 3-for-2 split in 2001, each share was converted into 1.5 shares (3 ÷ 2 = 1.5).Using this method, a single Nvidia share purchased before its first split in 1999 would have turned into 480 shares after the most recent 10-for-1 split in June 2024. That total is calculated by multiplying all the split ratios: (2 × 2 × 1.5 × 2 × 4 × 10).

## Calculating the Stock Splits in a Company's History

Calculating the cumulative effect of a company's stock splits over time begins by identifying each split event to determine its impact on share count and price. Then you apply each split ratio consecutively to the original share count. For example, if a company has had a two-for-one split followed by a three-for-one split, the original number of shares would be multiplied by six (2 × 3). The share price adjusts inversely to maintain the same market capitalization; that is, it would be one-sixth what it was, all else being equal.

### Example: Walmart's May 1971 Stock Split

Let's look at Walmart Inc.'s ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WMT)) May 1971 stock split as an example. This information is found on Walmart's investor website. We'll suppose you owned 200 shares of the stock on that day:

*   Stock split ratio: Two-for-one
*   Original number of shares: 200
*   Original cost per share: $8.25
*   Market price on the day of the split: $47.00

**Step-by-Step Calculation**:

1.  **Note the stock split ratio**: A two-for-one stock split means investors will now hold two shares for every share owned. The number of shares doubles while the price per share is cut in half.
2.  **Calculate the new number of shares**: New shares = Original shares × split ratio = 400 (200 × 2).
3.  **Adjust the share price**: New Price = Original Price ÷ Split ratio $23.50 ($47.00 ÷ 2)
4.  **Verify the values are consistent**: Before split: 200 shares × $47.00 = $9,400. After split: 400 shares × $23.50 = $9,400  
    

## Will a Stock Split Affect My Taxes?

No. Receiving more of the additional shares will not result in taxable income under U.S. law. The [tax basis](https://www.investopedia.com/terms/c/costbasis.asp) of each share owned after the stock split will be half what it was before the split. 

## Are Stock Splits Good or Bad?

Stock splits are generally done when the stock price of a company has risen so high that it might become an impediment to new investors. So, a split is often the result of growth or the prospects of future growth, and it could be a positive signal. In addition, the price of a stock that has just split may see an uptick if the lower nominal share price attracts new investors.

## Does the Stock Split Make the Company More or Less Valuable?

Stock splits [neither add nor subtract](https://www.investopedia.com/ask/answers/what-happens-to-options-when-stock-splits/) fundamental value. The split increases the number of shares outstanding, but the company's overall value does not change. Immediately following the split, the share price will proportionately adjust downward to reflect the company's market capitalization. If a company pays dividends, the [dividend per share](https://www.investopedia.com/ask/answers/06/splitdividend.asp) will be adjusted, too, keeping overall dividend payments the same.

## Do Mutual Funds Split like Individual Stocks?

[Mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp#:~:text=Mutual%20funds%20are%20defined%20as,its%20collective%20assets%20are%20doing.) can undergo splits, but they work differently than individual stock splits and occur less frequently. Mutual fund splits typically occur when the price per share is too high, making the fund less accessible to smaller investors. In a mutual fund split, the number of shares an investor owns increases while the [net asset value](https://www.investopedia.com/terms/n/nav.asp) per share decreases proportionally, just like a stock split.

## The Bottom Line

Stock splits are [corporate actions](https://www.investopedia.com/articles/03/081303.asp) that alter the number of outstanding shares and their price without changing a company's fundamental value or market capitalization. While theoretically neutral events, stock splits often generate a positive market reaction because of increased accessibility, perceived growth signals, and behavioral factors. Companies typically carry out splits to keep share prices within a preferred range, potentially boosting liquidity and broadening their investor base. Meanwhile, reverse splits are often used to avoid delisting or improve institutional appeal.

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. It can also potentially help you locate mispricing opportunities.

> **Article Sources**
>
> 1.  Iannino, Maria Chiara; Min Zhang, and Sergey Zhuk. "[Signaling Through Timing of Stock Splits](https://doi.org/10.1016/j.jcorpfin.2024.102610)." _Journal of Corporate Finance_, vol. 87, 2024.
>     
> 2.  H. K. Baker et al. “[Equity Markets, Valuation, and Analysis](https://www.wiley.com/en-us/Equity+Markets,+Valuation,+and+Analysis-p-9781119632931),” Pages 71–72. John Wiley & Sons, 2020.
>     
> 3.  S.K. Parameswaran. "[Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives](https://onlinelibrary.wiley.com/doi/book/10.1002/9781119816621)," Pages 87–88, 108. John Wiley & Sons, 2022.
>     
> 4.  Internal Revenue Service. "[Stocks (Options, Splits, Traders)](https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/stocks-options-splits-traders/stocks-options-splits-traders-7)."
>     
> 5.  Karim, Mohammad A., and Sayan Sarkar. "[Do Stock Splits Signal Undervaluation?](https://doi.org/10.1016/j.jbef.2016.01.004)" _Journal of Behavioral and Experimental Finance_, vol. 9, 2016, pp. 119-124.
>     
> 6.  Duffy, John; Jean Paul Rabanal, and Olga A. Rud. "[Market Reactions to Stock Splits: Experimental Evidence](https://doi.org/10.1016/j.jebo.2023.08.003)." _Journal of Economic Behavior & Organization_, vol. 214, 2023, pp. 325-345.
>     
> 7.  Chen, Honghui; Hoang Huy Nguyen, and Vijay Singal. "[The Information Content of Stock Splits](https://doi.org/10.1016/j.jbankfin.2011.02.005)." _Journal of Banking & Finance_, vol. 35, no. 9, 2011, pp. 2454-2467.
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> 8.  Weld, William C. et al. "[The Nominal Share Price Puzzle](https://www.aeaweb.org/articles?id=10.1257/jep.23.2.121)." _Journal of Economic Perspectives_, vol. 23, no. 2, 2009, pp. 121-142.
>     
> 9.  Li, Fengfei, et al. "[Behavioral Bias, Distorted Stock Prices, and Stock Splits](https://doi.org/10.1016/j.jbankfin.2023.106939)." _Journal of Banking & Finance_, vol. 154, 2023.
>     
> 10.  Securities Exchange Commission. "[Form 8-K](https://www.sec.gov/Archives/edgar/data/1045810/000104581024000113/nvda-20240522.htm#)."
>      
> 11.  Yahoo Finance. "[NVIDIA Historical Data: Stock Splits](https://finance.yahoo.com/quote/NVDA/history/?filter=split&period1=917015400&period2=1759421947)." 
>      
> 12.  Walmart Inc. "[Walmart Investor Relations](https://stock.walmart.com/resources/investor-contacts/default.aspx)."
>      
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