A stock split divides each existing share into several new ones. In a 2-for-1 split, every share becomes two shares, each worth half the former price. The company’s total value and your share of it stay exactly the same: you have more slices of the same pizza.
An example
You own 10 shares at $600, worth $6,000. The company does a 3-for-1 split. You now own 30 shares at $200: still $6,000. Your broker updates your account automatically, and your cost basis per share is adjusted (from $600 to $200 per share in this case). There is no tax to pay.
Real cases: Apple split 4-for-1 in 2020, Tesla 5-for-1 in 2020 and 3-for-1 in 2022, Nvidia 4-for-1 in 2021 and 10-for-1 in 2024.
Why companies split
- Lower price per share, which can feel more accessible to small investors and employees receiving stock.
- Easier options trading, since one contract covers 100 shares.
- Index considerations: for price-weighted indexes like the Dow Jones Industrial Average, a very high price can keep a stock out.
- A signal of confidence: companies usually split after a large rise.
With fractional shares now common, the accessibility argument matters less than it once did.
Reverse splits
A reverse split does the opposite: 1-for-10 turns 10 shares into one, at ten times the price. Companies often do this to stay above an exchange’s minimum price (the Nasdaq and NYSE generally require $1). A reverse split does not change value either, but it is frequently a sign of a struggling company, and such stocks have often kept falling afterwards. If you end up with a fraction of a share, the broker usually pays it out in cash.
Do splits make stocks go up?
Studies have found that stocks sometimes rise around split announcements, partly because splits tend to follow good news and strong momentum. The split itself creates no value. Buying a stock just because it is about to split is a weak reason; judge the business (how to research a company).
What you need to do
Usually nothing. Check after the split that your share count and cost basis look right, and adjust any open limit orders, which some brokers cancel at a split. The SEC’s Investor.gov glossary defines splits, and related ideas such as dividends are covered in our basics.
