Why Companies Split Their Stocks – And How It Impacts Your Portfolio

• Companies tend to resort to a forward stock split if they believe the share is trading at a relatively “high” level or outside of an “optimal” range.
• In 2024, Nvidia announced a 10-for-1 stock split following a rally in the chipmaker’s share price.
• In some instances, companies may use a reverse stock split to boost a low stock price or meet exchange listing requirements.

A stock split helps a company reduce its share price by increasing the number of outstanding shares, making them more accessible to retail investors without affecting the market value. Shareholders of a particular firm receive additional shares in proportion to their holdings, leaving their overall investment unchanged.

Existing shareholders end up with more shares than before, but the overall value of their investment stays the same. Tech giants such as Apple and Nvidia have all resorted to this initiative after strong share price gains.

In 2024, Nvidia announced a 10-for-1 stock split following a rally in the chipmaker’s share price. If the shares were trading at $1,000 apiece, the stock split would have lowered the price to $100 per share.

How Does A Stock Split Work?

According to Fidelity Investments, the most common variety of this is a forward stock split.

For example, a forward 2-for-1 stock split ratio implies that a stockholder would receive two shares for every one share owned. This raises the number of outstanding shares but does not alter a shareholder’s proportional ownership.

Or a 10-for-1 forward split means the shareholder with one share receives nine additional shares.

A reverse stock split is the opposite, as it reduces the number of shares while increasing the price per share. In some instances, companies may use a reverse stock split to boost a low stock price or meet exchange listing requirements.

For example, a 1-for-2 reverse stock split would mean that each investor would get one share for every two shares they own after the split, doubling the share price while keeping the total investment value constant. If a company is trading at $0.50 per share, a 1-for-2 reverse stock split would set the share price at $1 each.

Why Do Companies Split A Stock?

Companies tend to resort to a forward stock split when shares are perceived to be trading at a relatively “high” level or outside of an “optimal” range. As per Fidelity, management decisions are likely influenced by the stock’s historical trading performance, market perception, and other factors. The companies generally announce stock splits weeks before their implementation.

Similarly, for reverse stock splits, it may occur when share prices are ‘low’. Nasdaq has stated that reverse splits are sometimes followed by heavy issuance of discounted stock, convertible notes, and other securities to financiers, who sell them, leading to a decline in share prices.

How Does A Stock Split Impact A Portfolio?

While a stock split does not change the value of the investment, it can influence the market perception. Forward stock splits often signal management confidence and could lead to a rise in buying, while reverse splits could indicate some concerns or financial restructuring.

However, a stock split does not change the fundamentals or growth prospects of the underlying company.

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