Four Things Investors Should Know About Stock Splits

In 2020, three companies in the S&P 500 index announced plans for stock share splits, down from 102 companies in 1997 and seven in 2016.1



As an investor, you may wonder what a stock split is and how it might affect your portfolio. Although splitting stock shares has been much less common in recent years, it’s usually newsworthy when a high-profile company announces a planned split.

1. What is a stock split? A company may decide to lower the price of its stock by splitting each outstanding share into more than one share. With a traditional stock split, more shares are available, but the total value of all the shares (the company’s stock market capitalization) remains the same. For example, if a company announces a 2-for-1 split and you owned one share worth $100, you would own two shares worth $50 each.

2. Why do companies split their stock? Typically, stock splits occur when the price of individual shares has risen to a level that might discourage potential investors. More affordable share prices are thought to improve the liquidity, or the ease with which shares are bought and sold. Companies may also split stock to show management’s confidence in the future performance of the stock, as well as to stir up interest in the stock if it has been languishing.

3. What is a reverse stock split? In order to increase the per-share price of a stock, companies might opt for a reverse stock split, which creates one share from multiple shares. One reason why a company might issue a reverse stock split is to satisfy a stock exchange’s minimum share price. By decreasing the number of shares outstanding, the company boosts its stock price. Reverse stock splits could also make a company’s stock more appealing to investors who might perceive it as more valuable at a higher stock price.

4. How do stock splits affect investors? A common misconception is that splits automatically increase the value of an investor’s holdings. In reality, the number of shares owned is increased in proportion to the reduced price per share, so the total value of an investor’s holdings remains the same. Stock splits generally have no impact on the broader stock market or the fundamental value of the stock. Some argue that they may potentially pose at least one advantage to shareholders: A stock split draws wider attention to a company’s rising share price and the fact that it has been doing well.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Past performance is not a guarantee of future results.

Solon Financial Group
6200 SOM Center Rd. B21 Solon, OH 44139
Phone: (440) 519-1838, (866) 517-7302 Fax: (440) 519-1878

Securities and advisory services offered through Cetera Advisors LLC, member FINRA, SIPC. Cetera is under separate ownership from any other named entity.

6200 SOM Center Rd, B21, Solon, OH 44139

Individuals affiliated with this broker/dealer firm are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.

This site is published for residents of the United States only. Registered Representatives of Cetera Advisors LLC may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Not all of the products and services referenced on this site may be available in every state and through every advisor listed. For additional information please contact the advisor(s) listed on the site, visit the Cetera Advisors LLC site at www.ceteraadvisors.com

 

The registered representative(s) and/or investment adviser representative(s) listed on this website are licensed and registered in the following states:

We are licensed to sell Insurance Products in OH,PA.

[ Online Privacy Policy | Important Disclosures | Business Continuity | Privacy Promise | Order Routing Disclosure | Cetera Advisors ]