What Is a Stock Split and How Does It Impact Investors?

A stock split makes the stock more affordable for more investors and thus can be used to draw in new investors who may have been reluctant or simply unable to purchase the stock at its higher, pre-split price.

What is a stock split?

A stock split occurs when a company increases the number of its outstanding shares by a specified ratio, while the total value of all shares remains unchanged. This is because a stock split does not alter the company’s overall market capitalization.

In a stock split, the company sets a ratio, with 2-for-1 and 3-for-1 being the most common. For example, in a 2-for-1 split, each pre-split share becomes two shares post-split.

Several mega-cap tech companies, including Apple (AAPL), Tesla (TSLA), Alphabet (GOOG), and Amazon (AMZN), have recently implemented stock splits. Nvidia (NVDA) is following suit, announcing a 10-for-1 stock split set to take effect on June 7.

Typically, companies announce a stock split several weeks in advance, creating a window between the announcement and the actual split. However, it's important not to base your decision to buy or sell a stock solely on the stock split.

What happens when a stock splits?

A stock split doesn’t actually make investors wealthier. In fact, a company’s market capitalization—calculated by multiplying the number of outstanding shares by the price per share—remains unchanged following a stock split. While the number of shares increases, the price per share decreases proportionally.

However, investors often respond positively to stock splits because such announcements suggest that a company's board is looking to attract more investors by making shares more affordable and increasing their availability.

For potential investors who were previously unable to afford a share—like those in the case of Nvidia’s recent split—a stock split can create an opportunity to buy. This increased accessibility can lead to a rise in demand, potentially pushing the stock price higher, at least in the short term.

Research indicates that stocks that undergo splits tend to outperform the broader market in the year following the split and in the subsequent years.

How Does a Stock Split Impact Your Holdings/Portfolio?

It’s essential to understand that a stock split (including a reverse stock split) does not change your proportional ownership of the shares. While the number of shares you own will increase after a stock split, the overall value of your investment remains the same; the market ultimately determines any changes in total value.

For example, in a two-for-one stock split, each shareholder receives an additional share for every share they own, but the value of each share is halved. Thus, two shares together equal the original value of one share before the split.

How Does a Stock Split/Consolidation Affect My CFD Account?
If you hold a position in a company that undergoes a stock split or consolidation, your online broker will close your original position at the market's opening price and then open a new trade on your behalf. This new position will reflect the split or consolidation ratio, ensuring that your capital remains unchanged throughout the process.

If you have a stop order associated with your position, the broker will also close the original position at its opening price and create a new one that aligns with the terms of the stock split or consolidation. Any stops or limits will be adjusted accordingly, maintaining your monetary risk.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.