Stock Split
Definition
A corporate action that divides existing shares into multiple shares, reducing the per-share price proportionally while maintaining the same total market capitalization and each investor's ownership percentage.
A stock split increases the number of shares outstanding while reducing the price per share proportionally. In a 4-for-1 split, a $400 stock becomes four shares at $100 each. If you owned 10 shares at $400 ($4,000 total), you now own 40 shares at $100 ($4,000 total). Nothing changes economically.
Companies split shares primarily to make the stock more accessible to retail investors and to increase trading liquidity. When Apple split 4-for-1 in 2020 (from ~$500 to ~$125), it made the stock purchasable for more investors, especially those without fractional share access. Berkshire Hathaway's refusal to split (Class A shares trade above $600,000) is a deliberate choice to attract long-term holders.
Reverse stock splits work in the opposite direction — combining multiple shares into one. A 1-for-10 reverse split converts 100 shares at $1 into 10 shares at $10. Companies use reverse splits to meet exchange minimum price requirements or to appear more institutional. Reverse splits are often seen negatively as a sign of declining stock value.
Stock splits have no direct impact on value, but they can generate positive market sentiment and increased trading activity. Historically, stocks that split have slightly outperformed in the months following the announcement, likely due to the positive signal that management is confident in continued growth.
For tax purposes, a stock split adjusts your per-share cost basis but creates no taxable event. If your original 10 shares cost $200 each, after a 4-for-1 split your 40 shares have a cost basis of $50 each. The total cost basis ($2,000) remains unchanged.
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Frequently Asked Questions
Do stock splits make a stock cheaper?
Stock splits reduce the share price but not the total value. After a 2-for-1 split, you own twice as many shares at half the price. Your total investment value is unchanged. The stock isn't 'cheaper' — you just own more of a lower-priced unit.
Should I buy a stock before it splits?
A stock split doesn't change fundamental value, so the decision to buy should be based on the company's business, not the split. That said, stocks often see a modest run-up between split announcement and execution due to positive sentiment and increased accessibility.