Stock splits are a regular occurrence on stock exchanges and are sometimes misunderstood. The most typical splits are forward split where a shareholder will receive more shares as a result of the split. We will reserve the ability to go over reverse stock splits in a future blog.
Publicly traded companies have a set number of shares outstanding that can trade. Should a company look to expand the number of shares available the board of directors may authorize a stock split. One of the most common stock splits is a 2-for-1 split. This essentially will double the number of shares outstanding and provide an individual shareholder with twice the number of shares they originally had before the split.
A common misperception is that the shareholder will see an increased value in their position as a result of the split, this is not the case. The shareholder has the same value they had before the split, as they do immediately following the split.
As an example, let’s say there is a company scheduled to split 2-for-1 on November 4, 2022. On that date, any shareholder would receive double the number of shares, while the price would be cut in half. Let’s say that at the close of the market on November 3, 2022, an investor owns 500 shares and the closing price is $110 per share, making their investment worth $55,000. When they look at their accounts following the stock split they will own 1000 shares at $55 per share, the same value.
What are the Benefits?
Understanding that when a company you own goes through a stock split there is no inherent value gained by the split is important. There can be some benefits to both the shareholder and the company due to the split that may enhance (or not) shareholder value. Having the price of a share decreased could make it more attractive to other investors and they may have an interest in investing making the security seem more affordable. A larger number of shares outstanding, double in the case of the 2-for-1 split, will increase liquidity for investors too.
Companies typically will look to engage in a stock split when their stock prices have seen significant gains. We have seen companies like Amazon, Alphabet, Shopify and Tesla have a forward split in 2022. These are examples of how the splits work and can show you how splits greater than 2-for-1 may work.
Some companies may not believe in splits too, like Berkshire Hathaway A shares whose stock price is north of $400,000 per share. You can always look at the Berkshire Hathaway B shares if you need a lower price per share to own the stock.
The main takeaway is a 2-for-1 stock split does not add any immediate value to your holding, it is simply a different math equation with the same value for the amount you own, the dollar amount remains the same while the number of shares doubles, and the price per share is halved.
We would be happy to schedule a time to discuss how we can help you and your family understand stock splits. Feel free to schedule a 30 Minute Zoom Meeting for us to discuss what may be right for you.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice. Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. To determine what may be appropriate for you, consult your financial advisor.