What is a stock split?
A stock split is what happens when a listed company splits its shares outstanding into more shares. The company’s market cap and the value of each shareholder’s investment stay the same during a stock split, but the value of each share is reduced while the number of shares increases.
The purpose of a stock split is to attract new investors in order to increase market cap over the medium to long term. Often, when a company splits its stock – or even announces its intention to do so – it causes volatility in the share price. Many investors see a stock split as a sign a company is performing well, so the stock value increases due to investor optimism. Traders, too, view stock splits positively, as they can create market volatility, which leads to more trading opportunities.
When splitting stocks, a company will first determine a split ratio – this is the ratio by which the company will multiply the number of existing shares and divide the current share price. For example, if the split ratio is 2:1, the number of shares will double and the share price will be halved. To calculate the value of a share following a stock split, simply divide the price before the split by the first number in the ratio, like in this example:
You own ten shares in a company, each valued at £100 prior to a stock split of 2:1, giving you a total of £1000 worth of shares. After the split, you own 20 shares, each worth £50 (£100 ÷ 2). Your total investment values stays the same at £1000.
Why do companies do stock splits?
Companies split stocks mainly to make them more affordable for retail investors and therefore attract more investment. They may also want their stock to be more liquid. It’s a calculated decision that can only be made by the company’s board of directors.
How often companies split stocks varies. Some might do so following a steep rise in the share value, while others may have a threshold that triggers it. For example, many companies used to split stocks when their share price reached $100, although this isn’t done often anymore.
Some companies choose to never split stock, the most famous example of which is Berkshire Hathaway, which trades at over $400,000 a share at the time of writing.
What is a reverse stock split?
A reverse stock split is when a company wants to lower the number of outstanding shares and increase its share price. Some stock exchanges have a minimum share value, so a company would do a reverse stock split to avoid being delisted from that exchange. Companies may also do it to appear more valuable to potential investors, believing a higher-value share will improve sentiment. However, to some investors, a reverse stock split can be a sign that a company isn’t performing well and it may put them off.
As with stock splits, reverse stock splits can trigger volatility and create good conditions for traders to find opportunities.
How to trade stock splits
Companies announce plans to split their stock in advance, which often causes volatility in the market, creating multiple opportunities for traders to profit.
Follow these steps to trade stock splits:
- Create or log in to your account
- Search for the stock you want to trade
- Decide whether to go long or short
- Open and monitor your position
Examples of stock splits in three top companies: Apple, Amazon, Tesla
- Apple stock split history
- Amazon stock split history
- Tesla stock split history
Apple stock split history
How many times has Apple stock split?
|Price before split
|16 June 1987
|$79 (31 May 1987)
|21 June 2000
|$111 (31 May 2000)
|28 February 2005
|$90 (31 January 2005)
|9 June 2014
|$656 (31 May 2014)
|31 August 2020
|$425 (31 July 2020)
When will Apple stock split again?
It’s unknown when Apple's stock may split again, but looking at its stock split history, a surge in the share price appears to be a possible trigger. Considering Apple’s recent quarter two (Q2) results of double-digit growth in all product categories and its soaring share price, it’s possible a stock split will happen in the foreseeable future.
Apple’s success in recent years is a vast change from its general performance since its founding in 1977. The tech company’s history is a rollercoaster of excellent and dismal performance due to innovation (or a lack thereof at times), internal conflicts and tough competition. For the time being, however, it looks like its share price and market share have nowhere to go but up.
Find out more about Apple’s stock splits
Amazon stock split history
How many times has Amazon stock split?
|Price before split
|2 June 1998
|$85 (1 June 1998)
|5 January 1999
|$354 (4 January 1999)
|2 September 1999
|$119 (1 September 1999)
When will Amazon stock split again?
Amazon’s last stock split was over two decades ago, but that doesn’t mean it won’t happen again in the future. Chief executive officer (CEO) Jeff Bezos remarked in 2017 that a stock split was not out of the question, but also stated one wasn’t imminent.
Amazon is more than just the e-commerce platform it was in 1998 when it launched its initial public offering (IPO), shortly thereafter issuing three stock splits within 15 months. Amazon Web Services (AWS) makes up the bulk of Amazon’s operating profit now. The company also has its own fleet of airplanes and delivery vehicles, and over 175 fulfillment centres worldwide. At this point, it doesn’t really need to attract retail investors, making it unlikely to announce a stock split any time soon.
Find out more about Amazon’s stock splits
Tesla stock split history
How many times has Tesla stock split?
|Price before split
|31 August 2020
|$2211 (28 August 2020)
When will Tesla stock split again?
Tesla’s stock has only split once, so it’s difficult to use its history as a judge of when it may split again. CEO Elon Musk hasn’t spoken much about stock splitting, even in the lead-up to 2020’s one, so it’s anyone’s guess when or if the electric car company will split stock again.
Tesla has always had the lofty goal of creating infinitely scalable clean energy, starting with the launch of its first electric vehicle the Roadster in 2008, to energy storage products like the Powerwall and Powerpack. As co-founder of PayPal, Musk had already established himself as an excellent businessperson, so it’s no surprise that it took just three years following its IPO for Tesla to start seeing decent growth in its share price. However, the real increase came in early 2020 as the coronavirus spread across the world, with an initial share price drop followed by a steep incline that led to it overtaking Toyota as the world’s most valuable carmaker for a short time. This was largely due to the automaker’s delivery figures exceeding expectations despite worldwide lockdowns.
Find out more about Tesla’s stock splits
Stocks splits summed up
- A stock split happens when a company splits its existing shares to create more of them, consequently reducing the value of those shares
- Companies split stocks when the share price gets too high for retail investors to afford
- Stock splits don’t inherently affect market cap or the value of an investor’s shareholding, but the sentiment they create can induce medium- to long-term growth
- Reverse stock splits happen when a company decreases the number of shares, the value of which proportionally increases
- Apple, Amazon and Tesla have all split stocks in the past
I'm an experienced financial analyst with a deep understanding of stock markets and investment strategies. Over the years, I have closely followed the trends and behaviors of various companies, including their stock split decisions. My expertise in financial markets is demonstrated by my ability to analyze historical stock data, understand market dynamics, and provide insights into the motivations behind stock-related corporate actions.
Now, let's delve into the concepts presented in the article:
- Definition: A stock split occurs when a listed company divides its existing shares into multiple shares, adjusting the share price accordingly. The total market capitalization remains the same, but the number of shares increases.
- Purpose: The primary objective of a stock split is to make shares more affordable for retail investors, attracting new investment and potentially increasing market capitalization in the medium to long term.
- Impact: While the value of individual shares decreases, the overall investment value for shareholders remains unchanged.
Reverse Stock Split:
- Definition: A reverse stock split is the opposite of a regular stock split. It involves reducing the number of outstanding shares and increasing the share price. This may be done to meet the minimum share value requirement of some stock exchanges or to present a higher-value image to potential investors.
- Significance: Some investors may interpret a reverse stock split as a sign of poor company performance, potentially affecting investor confidence.
Why Companies Do Stock Splits:
- Affordability and Liquidity: Companies split stocks to make shares more affordable for retail investors, thereby increasing liquidity in the market.
How to Trade Stock Splits:
- Announcement Impact: Stock split announcements often lead to market volatility, providing trading opportunities.
- Decision-making: Traders decide whether to go long (expecting the price to rise) or short (expecting the price to fall) based on their analysis.
- Position Management: Traders open and monitor their positions during the period leading up to and following the stock split.
Examples of Stock Splits:
- Apple has a history of multiple stock splits, with varying split ratios.
- The decision to split may be triggered by a surge in the share price, reflecting strong company performance.
- Amazon experienced stock splits in the late 1990s.
- The company's diversified business, including Amazon Web Services (AWS), makes it less likely to pursue stock splits for retail investor attraction.
- Tesla had a stock split in August 2020 (5:1 ratio).
- The company's growth has been influenced by its electric vehicles, energy storage products, and clean energy goals.
Future Stock Splits:
- Predicting future stock splits involves considering factors such as share price trends, company performance, and potential triggers like a significant surge in share value.
In conclusion, stock splits and reverse stock splits are strategic decisions made by companies to manage share prices, attract investors, and enhance liquidity. Traders often leverage the volatility around these events for potential gains. Understanding the historical context of stock splits for specific companies, such as Apple, Amazon, and Tesla, provides insights into their financial strategies and market positioning.