What are stock splits?
A stock split happens when a company increases the number of its shares and lowers the price of each share at the same time. The company’s total market value and its fundamentals stay the same – only the share count and price change.
The aim is to make shares more affordable and easier to trade for a wider group of investors. Think of it like swapping a $20 note for twenty $1 coins – the overall value hasn’t changed, but now you have more smaller units to use.
What does it mean when a stock splits?
A stock split is a corporate action where a company divides its existing shares into smaller units. For example, in a 2-for-1 split, each share becomes two, while the price per share is halved. The company’s market capitalisation – the total value of all its shares – stays the same straight after the split.
Stock splits can make shares easier to buy and sell, and open them up to more investors. In a forward split, the number of shares goes up and the price per share goes down. In a reverse split, shares are combined so the price per share goes up. Unlike issuing new shares, a stock split doesn’t raise extra money for the company or change its fundamentals.
Trading share CFDs is risky and you could lose money. Make sure you understand the risks before trading.
How do stock splits work?
When a company announces a stock split, shareholders get extra shares for each one they already own, while the price of each share drops in the same ratio. This happens automatically through brokers and trading platforms.
The new share count and price take effect on the ex-split date – the first trading day after the split is applied. If fractional shares appear, brokers may instead issue a cash payment.
Example: 2-for-1 split
Suppose you own 100 shares of Company XYZ trading at $50 each ($5,000 total). After a 2-for-1 split, you’d hold 200 shares worth $25 each – your total value still stays at $5,000.
Example: Reverse split
In a reverse split, such as 1-for-2, the opposite happens. If you owned 200 shares at $25 each, you’d end up with 100 shares at $50 each. This type of split is less common and is sometimes used to help a company meet stock exchange rules for minimum share price.
Types of stock splits
Stock splits usually fall into two main categories:
| Aspect | Forward split | Reverse split |
|---|---|---|
| Effect on share count | Goes up | Goes down |
| Effect on share price | Goes down | Goes up |
| Typical purpose | Used to make shares more affordable and accessible | Used to help companies meet stock exchange rules for minimum share price |
Some companies also use fractional or odd-lot splits – for example, 3-for-2 or 1.5-for-1. These adjust the share price without making a big change to the company’s total number of shares.
Why do stock splits happen?
Companies split their stock for several reasons, potentially to make shares easier to trade and keep the company attractive to investors.
- Keeping the share price accessible – very high share prices can put off retail investors. A split can bring the price back into a more affordable range.
- Attracting more investors – lower prices may draw in more retail investors, which can boost trading activity and improve market liquidity. A broader base of investors can also help keep price movements steadier.
- Showing confidence – stock splits may be announced when a company is performing well and expects further growth. This can send a signal that management is confident about the future.
- Meeting exchange rules – reverse splits may be used to raise the share price to meet minimum listing requirements set by stock exchanges, helping a company avoid delisting.
What happens when a stock splits?
A stock split doesn’t change a company’s total market value, but it can influence how people trade and react. The share price and share count adjust automatically, yet market psychology sometimes leads to more trading activity after a split.
Impact on shareholders
For shareholders, the overall financial outcome is neutral straight after a split. You hold more shares, but each one is worth less – so the total stays the same.
Portfolio value
Your portfolio’s total value stays the same immediately after a split, even though the number of shares and price per share change in line with the split ratio. Small differences can arise if brokers make cash payments instead of issuing fractional shares.
Liquidity
Having more shares in circulation can boost trading volumes and improve liquidity, making it easier to buy or sell at the price you want. There may be short-term volatility around the ex-split date, while long-term performance depends on the company and its sector.
Stock splits vs. stock dividends
Both stock splits and stock dividends increase the number of shares, but they work in different ways and have different implications.
- Stock dividends give shareholders extra shares as a form of dividend. The value is shifted from retained earnings to share capital, and this may create tax liabilities depending on the jurisdiction.
- Stock splits simply divide existing shares into smaller units by adjusting their face (par) value. This doesn’t affect retained earnings.
How to trade around stock splits
Traders may take different approaches before and after a stock split, depending on their goals and risk tolerance. Remember: trading CFDs is risky and you could lose money. Nothing here is investment advice.
Pre-split approaches
- Building positions vs waiting: some traders buy shares ahead of the ex-split date, hoping to benefit from possible momentum. Others prefer to wait until after the split to avoid short-term volatility and see where the new price settles.
Post-split approaches
- Momentum: higher liquidity and retail interest can sometimes lead to short-term rallies. Traders may use momentum indicators to spot entry points, and tight stop-losses can help manage volatility.*
- Rebalancing: because splits change position sizes and portfolio weights, some traders review and adjust allocations to keep risk levels on target.
Technical considerations
- Indicators: moving averages, Fibonacci retracements, and support/resistance zones, may need to be adjusted to the new share price.
- Patterns: chart patterns such as flags or breakouts can look distorted right after a split. Waiting a few sessions for the market to settle can make signals clearer.
*Stop-loss orders are not guaranteed. Guaranteed stop-loss orders (GSLOs) incur a fee if activated.
Moving forward with stock splits
When looking at companies that announce splits, it’s important to focus on the fundamentals, not just the split itself. Check factors such as financial health, growth prospects and market position.
Make sure your portfolio reflects the split – update for split-adjusted share counts, and keep an eye on company announcements for future splits. It’s also a good idea to review your brokerage statements to confirm adjustments have been applied correctly.
Trading CFDs is risky and involves leverage, which can magnify both gains and losses. You could lose money quickly. Make sure you fully understand the risks before trading.