What are stock splits? – Stock splits happen when a company increases its outstanding shares to make the stock more affordable to investors. For example, instead of a stock trading at $1,000 per share, a 10-for-1 stock split would allow it to trade for $100 per share (FIGURE 1) while the number of held shares would increase tenfold. This is also called a forward split.  

Benefits of forward splits – Companies tend to implement forward stock splits when the outlook for continued growth and profitability is strongest. Making it easier for investors to buy shares at a lower share price also helps companies broaden their base of ownership. From time to time, stock splits are followed by a bump in stock performance—but not always.

No taxes owed! – Stock splits aren’t a taxable event, but an investor’s cost basis in a stock should be adjusted to reflect a split. For example, after a 2-for-1 stock split, the cost basis of each share owned after the split will be half of what it was before the split.  

Do mutual funds split like individual stocks? – Yes. Mutual funds split the same way individual companies split, but it’s much less common. These splits help to bring in new money and make the fund more marketable. Mutual fund investors can benefit when individual companies do stock splits if the fund they own holds those companies.

Do stock splits benefit investors? – It’s nice to own more shares after a split, since the reduced per-share price might mean there’s room for greater potential price growth. But investors shouldn’t buy a stock simply because they hope it’ll rise in price after a split. Over the long term, a company’s value is determined by its earnings, not its stock price.

A recent example – In early 2024, the per-share price of Walmart, the retail giant, had risen close to $182.00—a high barrier for many ordinary investors in the view of the company’s management. In late January 2024, Walmart announced a 3-for-1 stock effective February 26. After the split, the shares traded at a more affordable $60.45.

What is the most common stock split ratio? – A 2-for-1 stock split is the most common ratio. Three-for-two splits are also common, but fractional splits are not unheard of. In March 2024, Tootsie Roll Industries Inc., the confectionary manufacturer famous for the iconic Tootsie Roll candy, implemented a 1.03-for-1 split.

What's a reverse split? – In a reverse stock split, a company decides to decrease the number of outstanding shares to make the stock more expensive to investors. For example, instead of a stock trading at $5 per share, a 10-for-1 reverse stock split would allow it to trade for $50 per share (FIGURE 2). Shareholders end up with 10 fewer shares for each share formerly held.

But isn't a cheaper share price better? – Not always. A stock price might sink so low that a company’s reputation can be put at risk. Other times, a price that dips below a certain threshold can cause the stock to be delisted from an exchange or dropped from some mutual-fund holdings. Reverse splits are sometimes seen as a sign of company turmoil.