Everything you need to know about stock splits and reverse stock splits

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:

1. Create or log in to your account
2. Search for the shares you want to trade
3. Decide whether to go long or short
4. Open and monitor your position

Examples of stock splits in three top companies: Apple, Amazon, Tesla

1. Apple stock split history
2. Amazon stock split history
3. Tesla stock split history

Apple stock split history

How many times has Apple stock split?

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.

Amazon stock split history

How many times has Amazon stock split?

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. Former 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.

Tesla stock split history

How many times has Tesla stock split?

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.

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