Upcoming Stock Splits Calendar

Stock splits give investors more shares of a stock without increasing the intrinsic value of the stock

A stock split is an adjustment in the total number of available shares in a publicly-traded company. As the number of available shares change, the market capitalization of the company remains the same and dilution does not occur. For example, in a 2-for-1 split, a shareholder that held 1,000 shares priced at $100 would have 2,000 shares with each share priced at $50 after the split.

This article will help investors understand stock splits, why companies issue them, and whether or not they offer value to shareholders. This article will also explain the idea of a reverse stock split and the effect of a stock split on investors looking to short sell a stock.

A Stock Split Does Not Affect a Stock’s Intrinsic Value

For investors a stock split is sort of like asking somebody to give you change for a $20 bill. You wind up with more bills in your wallet, but the intrinsic value of those bills is the same. In the same way, when a company splits its stock the number of shares the investor owns has increased by the multiple of the split, but the value of those shares remains the same (apart from normal market movement).

The net effect of a split for investors is that they receive an additional share(s) for every share they own, but the value of each share is now reduced by the factor of the split. If a company issued a 2:1 split, the value of each share would be cut in half. In a 3:1 split, each share would be cut by 2/3, and so on.

The most common splits are 2:1, 3:2, or 3:1. Let’s look at those splits from the point of view of the company and the investor.

How Does a Stock Split Impact Companies and Investors?

First let’s look at stock splits from the company’s point of view. Let’s say XYZ company has 1,000,000 outstanding shares trading at $60 per share. Their market capitalization is $60 million dollars.

• If they issue a 2:1 stock split, they now have 2,000,000 outstanding shares that are trading at $30 per share. Their market capitalization stays at $60 million dollars (2,000,000 x 30).
• In a 3:1 split, the outstanding shares would increase to 3,000,000 while the price per share would be reduced to $20 keeping the market cap the same.
• In a 3:2 split, the number of shares would increase to 1,500,000 and the price per share would become $40. In all cases, the market capitalization does not change.

Now let’s look at the same example from the point-of-view of an investor.

• If an investor owns 200 shares in XYZ company that are trading at $60/share and the company issues a 2:1 stock split, they now have 400 shares (200 x 2), but each share is now worth $30/share.
• If the company offered a 3:1 split, the investors would now own 600 shares (200 x 3), but each share would now be worth $20/share.
• In a 3:2 split, the investor would own 300 shares at a price per share of $40.

However, in all of these examples, the intrinsic value of their holdings remains the same.

Understanding the Stock Split Process

The process of a stock split is similar to that of a dividend payment. Once a company decides to split its shares and receives board approval it issues an announcement with the stock split ratio and the following information:

• The record date – this is the date when shareholders must own the stock to take part in the split.
• The split pay date – this is the date when the stock split takes place and investors receive their new shares.
• The split ex date – this is the date on which the company’s stock begins trading at the adjusted price.

Why Do Companies Issue Stock Splits?

The most common reason that a company splits its stock is because it believes its shares are overpriced. This is not the same as saying they believe the stock is overvalued. Remember, the market capitalization doesn’t change. But perhaps, the stock is trading at levels so far above other stocks in its sector that it has become less attractive to investors. By lowering the share price, the company can make it more attractive, and accessible to more investors.

A second reason that a company may choose to issue a stock split is to increase the liquidity of their stock. Liquidity is a measure of how quickly shares can be bought or sold in the market without causing the stock price to increase.

For example, when a stock like Apple (NASDAQ:AAPL) is priced at hundreds of dollars per share, there can be a very large bid/ask spread. The bid/ask spread is simply the maximum price a buyer will pay versus the minimum price a seller will accept. If the spreads are too large, the stock will have less liquidity. In this case, a stock split may help make it easier for investors to buy and sell a company’s stock.

Do Stock Splits Add Value to Shareholders?

Financial professionals and economic professors generally say stock splits are meaningless because the intrinsic value of the company does not change. The value of the investment is the same, the only thing that’s changed is the number of shares an investor owns.

Still, there is circumstantial evidence that concludes there can be a halo effect on stocks that split. After all, the effect of lowering a company’s share price is that it can become more accessible to individual investors. There have been several examples of stocks that increase in value in the days and weeks following the initial drop following the split.

One of the best examples of this happened in 2014 after Apple issued a 7:1 stock split. Before the company announced the split, Apple’s stock was trading at a price of $645.57 per share. After the split, the price was 645.57/7 = $92.70 per share. Apple’s outstanding shares increased from 861 million shares to 6 billion shares while its market cap stayed around $556 billion. Shareholders who owned 1,000 shares would now own 7,000 shares.

However, the day after the stock split, there was renewed demand from investors and the stock increased from $92.70 to $95.05 per share. So an investor who owned 7,000 shares on the day of the split would have seen a gain of $16,450. While such returns are possible, it is not a reliable trading strategy because it is difficult to predict both the occurrence of stock splits and the impact on investors.

How Short Sellers Trade Upcoming Stock Splits

A stock split may get in the way of other investing strategies, such as short selling. When an investor is trying to short sell a stock, they are borrowing shares of a company and are required to return them at a future date. Investors short sell a stock in anticipation that the price will fall.

A stock split may impact a short seller because the price moves down faster than they were anticipating. However, from an intrinsic value standpoint, it has no effect because the total value the investor borrowed is the same as before. For example, if a short seller borrows 100 shares of a company’s common stock that is trading at $30 per share and the company issues a stock split ratio of 2:1, the investor will now have to return 200 shares—but the cost per share will only be $15.

A short seller can profit from a short sale if the price per share of the stock was higher when they initiated the trade, compared to when the stock split. In our example, if the short seller bought the initial 100 shares for $35 per share, their initial investment as $3,500. If they decide to close their position immediately after the short sale, they would be required to buy 200 shares at the market price of $15 per share at a cost of $3,000. Their profit would be the difference between the entry price and the price they paid at closing: $500.

But what happens if the price increases following the split and before you buy? Your cost basis in the original issued shares could be higher than your expected return. There are also accounting issues that arise when issues stock splits, which may result in extra fees for some accounts

What is a Reverse Stock Split?

In a reverse stock split, the number of outstanding shares decreases and the price per share increases. The practical example is you giving somebody two $10 bills in exchange for a $20 bill. Let’s look at a reverse stock split from the point-of-view of a company and an investor.

Company ABC has 8 million outstanding shares valued at $2.50 share. Their market capitalization is 20 million dollars. They issue a 1:2 split. This decreases their outstanding shares from 8 million to 4 million and increases the value of those shares to $5.00. The market capitalization remains at 20 million dollars.

For an investor who owned 500 shares at $2.50. They would now own 250 shares at $5.00 per share. But the intrinsic value of that asset in their portfolio would still be $1,250.

There are three primary reasons companies issue a reverse stock split.

• In order to maintain a listing on a major stock exchange. Many stock exchanges will delist a stock if its price per share falls below a certain amount.
• If the company perceives that their stock is being manipulated as a result of speculator trading.
• If their stock is trading far below other companies in their sector.

Why Do Stock Splits Matter?

Stock splits are a common corporate action that effectively increases the amount of outstanding shares while lowering the price per share by the same factor. Companies engage in this practice to make their stock price more attractive to investors and to increase the liquidity of their stock in the market.

The most common split ratios are 2:1, 3:2, and 3:1 although there are some splits that can be as high as 4:1, 7:1 or higher. Because the intrinsic value of the stock does not change, nor does the company’s market capitalization, the ratio is not normally a point of concern for most investors.

However, stocks may benefit from a halo effect after a stock split. In this case, a company’s stock may rise because investors perceive that the company is more attractive.

In a reverse stock split, the net effect is exactly the opposite of a stock split. The number of outstanding shares decreases while the price per share increases by the same factor. Reverse stock splits are typically done to discourage investor speculation and to prevent a company’s stock from being delisted on a major stock exchange. To avoid being surprised by any changes to your portfolio of stocks you may want to track or receive alerts when stock splits are scheduled.