Stock Split

A stock split is when a company divides its existing shares into multiple new shares to make the stock more affordable and increase liquidity. Your total investment value stays exactly the same—you just have more shares at a lower price.

How It Works (2:1 Forward Split):

• Before: 100 shares at $200/share = $20,000 total
• After: 200 shares at $100/share = $20,000 total
• You have 2× the shares at ½ the price

Common Split Ratios:

• 2:1 (most common): 1 share becomes 2 shares
• 3:1: 1 share becomes 3 shares
• 3:2: 2 shares become 3 shares
• 10:1: 1 share becomes 10 shares (rare, very high-priced stocks)

Why Companies Split Stocks:

1. Psychological Accessibility: A $2,000 stock feels expensive, but $200 feels more affordable to retail investors after a 10:1 split.

2. Increase Liquidity: More shares trading at lower prices can increase trading volume and market participation.

3. Options Market: Options contracts represent 100 shares. Lower stock prices make options more accessible.

Real-World Examples:

Apple:

• 1987: 2:1 split
• 2000: 2:1 split
• 2005: 2:1 split
• 2014: 7:1 split
• 2020: 4:1 split
• If you bought 1 share in 1980, you'd have 224 shares today

Amazon (2022): 20:1 split brought price from $2,785 to $139

Tesla:

• 2020: 5:1 split
• 2022: 3:1 split

What Doesn't Change:

• Total investment value (immediately)
• Market capitalization of company
• Your ownership percentage
• Total dividend income (adjusts per-share amount)
• Tax basis (automatically adjusted)

What Does Change:

• Number of shares you own (increases)
• Price per share (decreases proportionally)
• Dividend per share (decreases proportionally)
• Cost basis per share (adjusts automatically)

Tax Implications: Stock splits are NOT taxable events. Your broker automatically adjusts your cost basis. No reporting required.

Historical Performance: Research shows stocks often perform slightly better after splits due to increased retail investor interest and improved liquidity, but the split itself doesn't create fundamental value.

The Bottom Line: A stock split is like cutting a pizza into more slices—you have more pieces, but the same amount of pizza. It's a cosmetic change that doesn't affect your wealth, but can improve trading dynamics.