What are Stock splits? Investing Explained
INVESTING EXPLAINED: What you need to know about stock splits – when a company splits its stock into smaller pieces if the price is too high
In this series, we break down the jargon and explain a popular investment term or theme. Here are the stock splits.
What is this?
If a company decides its stock price is too high, it can order a stock split, dividing its stock into smaller chunks, with each individual share becoming two shares, four shares, five shares — or even 20 shares.
After the split, the market value of the company remains the same as before and similarly, each shareholder only owns smaller slices of the same pie.
Why do companies do the splits?
The goal is to lower the price to make the stock more attractive to new investors. A small investor with £1,000 to spend may be put off by, say, a share price of £500 that allows him to buy only two shares.
A stock split can also make it easier to issue stock options to incentivize employees and maintain their loyalty.
Smaller slice of the pie: After the split, the company’s market value remains the same as before
Any other reasons to do this?
A stock split is often seen as a sign of confidence. While this may not be the primary intent of the move, the split sends a signal to markets that the company’s executives are optimistic about the outlook.
This allows the share price to rise in the days before and after the stock split. But this is not always the case. Some investors like the buy-the-rumours-sell-the-news approach. So they are hesitant to buy shares in a company in the period after a stock split, and as a result the share price may fall.
Who took this step?
The US tech giants love a stock split. Amazon has done it four times since 1998, with the most recent split in June 2022.
On this occasion, there was a 20-for-one share split, following a 4,300 percent price increase since the previous split in September 1999. As a result of these splits, everyone who owned one Amazon share before 1998 ended up with 240.
Any other big names?
Last year was a peak year for splits due to the surge in tech stocks over the past decade. Apple (four for one); Alphabet, the owner of Google (20-for-one); Shopify (10-for-one) and Tesla (five-for-one) all did the splits.
The ostensible purpose of the Tesla split was to facilitate employee purchases of stock. But it was also part of boss Elon Musk’s plan to make the electric vehicle maker the most valuable company in the world.
Can a company do a reverse split?
Yes. If a company is struggling, this can be a way to boost its share price.
The number of shares is reduced, increasing the price of each individual share. The company may also issue some new shares at the same time.
The goal is to improve the company’s image and encourage more demand for the stock, though the maneuver may raise suspicion instead.
A reverse stock split can also be a means of maintaining a stock exchange listing, as many exchanges have a minimum price; if a company’s price falls below that level, it is delisted.
Are there current reverse splits?
American retailer Bed Bath & Beyond went bankrupt earlier this month. This followed a failed attempt to perform a reverse split. The shares, which were $80 a decade ago, had fallen below $1.