What is a Stock Split? - 2022 - Robinhood (2024)

Robinhood Learn

Democratize Finance For All. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.

Stock splits (and reverse stock splits) are often about psychology. Their purpose is to make an individual stock cheaper (or more expensive) by adjusting the number of shares available. On paper, this doesn’t affect the company’s overall value, but it can help improve liquidity (aka the speed and ease with which someone can trade a stock), by making it easier for investors to trade shares.

In the case of a stock split, a company’s board of directors may determine that their shares appear too expensive to potential investors. So, the board might decide to cut the share price in half and double the number of shares outstanding. For each share you owned before the split, you’d receive two, proportionally less expensive shares after. (This would be a 2-for-1 split.) For a struggling company though, a reverse stock split might be useful — That is, combining shares to push the stock price higher. For instance, in a 1-for-4 reverse split, you would receive one, more expensive share for every 4 shares you owned before the reverse split.

Ultimately, for existing investors, the result is the same. The number of shares you own and their individual price may change, but stock splits (and reverse stock splits) don’t actually change the total value of your investment.

Apple has a long history of stock splits. In fact, since the company went public in December 1980, its stock has split four separate times. In July 2020, the company announced that a fifth split would happen in August 2020 (more on that in a moment).

Slicing up Apple

• June 16, 1987: 2-for-1 split
• June 21, 2000: 2-for-1 split
• Feb. 28, 2005: 2-for-1 split
• June 9, 2014: 7-for-1 split

That means, if an investor kept their stock, someone who owned one share of Apple in Dec. 1980 would have 56 shares as of July 2020. However, with Apple’s continued growth and its stock trading near $400, the company announced yet another split (a 4-for-1), scheduled for the end of August 2020. The company expects its newly-split shares to begin trading on Aug. 31, 2020.

Yogi Berra nailed it...

Cut my pizza into 4 slices — I’m not hungry enough to eat 8.Hold up, Yogi! It doesn’t matter how you cut it, the pizza is still the same size! This captures the same effect of a stock split: The number of underlying shares (or slices) changes, but the company itself is no different because of the split. Unlike a pizza though, over time, a company might grow or shrink, for instance, as it explores new business lines or faces production difficulties. These shifts could influence whether the company pursues another split, or considers a reverse split.

Sign up for Robinhood

If companies that are doing well and have pricey shares pursue stock splits, then what do distressed companies do? Well, they can do the opposite. If a company is worried that its stock seems too cheap, it might consider a “reverse split” — That is, combining shares to raise its stock price. You might think of it like rolling together two smaller pieces of playdough into one larger ball. The amount of clay you have is exactly the same, but it’s now one bigger blob. Likewise, a company that goes through a reverse split has a smaller number of more expensive shares (but the underlying business is unchanged).

So, why do reverse splits happen? There are many possibilities. A company’s management team might think that their share price seems low compared to industry peers and competitors. They might even worry that a seemingly low-priced stock reflects poorly on their company’s potential. Another concern could be getting delisted from a stock exchange. Some exchanges, like the New York Stock Exchange, require a $1 per share minimum (and a company rarely wants to get kicked out of the club).

Regardless of whether you’re examining stock split, or a reverse stock split, here’s one thing to keep in mind: Ultimately, the market value of a publicly traded company is measured by its market capitalization, which is stock price multiplied by the number of shares outstanding.

Blue Apron, the meal-kit pioneer, is an example of a company that went through a reverse stock split. In June 2019, its shares fell below $1, trading at about $0.55 apiece. That was cheap. Too cheap, if you asked the Blue Apron Board of Directors. In fact, it was so cheap that the New York Stock Exchange, where those shares were listed, warned Blue Apron that if its stock price didn’t rise above $1 soon, it might be delisted. If that happened, then Blue Apron stock would have been relegated to the less accessible (and less prestigious) “over-the-counter” markets.

So, Blue Apron’s Board of Directors approved a 1-for-15 reverse stock split and publicly announced the news (Source: Blue Apron Investor Relations, June 13, 2019).

Bear in mind, if a company resorts to a reverse stock split to increase its share price, it’s often a concerning signal to investors. So, after a reverse stock split, it’s not uncommon for shares to trade lower because of persistent worries about the company’s future.

Here’s how the processes differ.

Stock split

• A company wants a lower stock price so its shares are more affordable to investors.
• So, the company splits its shares. To cut the share price in half, it would pursue a “2-for-1” or “2:1” stock split. Shares could split into even smaller pieces. To reduce the share price to one-eighth, for example, a company could pursue a “8-for-1” or “8:1” stock split.
• A 2-for-1 split doubles the number of shares. An 8-for-1 stock split multiples the number of shares by 8.
• The total value of the company doesn’t change — It’s the same pizza, which has been cut into smaller slices.

Reverse stock split

• A company wants a higher stock price so that it doesn’t get delisted from an exchange.
• So, the company combines shares in a reverse stock split. To double the stock price, it would pursue a “1-for-2” or “1:2” reverse stock split. To increase the stock price by a multiple of six it would do a “1-for-6” or “1:6” reverse stock split.
• A 1-for-2 reverse stock split halves the number of shares. A 6-for-1 reverse stock split reduces the overall number of shares by a factor of six.
• The total value of the company doesn’t change — It’s just a pizza that’s been cut up into fewer slices.

There are plenty of ratios a board can choose from when they pursue a stock split. Some possible stock splits are 2-for-1, 3-for-1, and even 3-for-2. Reverse stock splits follow a similar pattern, except in reverse (i.e., 1-for-2, 1-for-3, or 2-for-3). You might also see them written with colons, like 2:1 or 1:2.

But there is one real-world difference to keep in mind. Since reverse stock splits often aim to raise a stock’s price , they often use larger numbers. For example, you may come across 1-for-7 reverse splits, or even 1-for-15 (as we saw with Blue Apron).

More dramatic splits and reverse splits also have the benefit of longevity. The bigger the split, the less likely it is that you’ll need to engage in another split sometime in the future.

This is the fascinating element about stock splits and reverse stock splits — They barely affect existing investors. This corporate action is more of a psychological game the company plays with potential future investors who might be concerned about the stock’s price. Because a stock split or reverse stock split changes the number of shares and the price of the shares in an inverse proportion, the overall value of the company stays the same.

Need help with a stock split? Check out our Help Center.

• Corporate Actions
• Stock Splits and Options
• Stock Splits and Fractional Shares

Sign up for Robinhood