Beginners Guide to Stock Splits

Fri Dec 27, 2019, 04:01 pm | by Abbey Polin | No comments

Traditionally, having to split something is not ideal. That’s typically not the case when it comes to stock splits. According to Investopedia, stock splits are a relatively good thing because it allows companies to increase their shares without inflating the price. Shares are divided to create additional shares. The price of the stock also gets divided, which makes it significantly lower.

What is a Stock Split?

When a company wants to lower the price of their shares to make them more affordable, they may split their current stock. This allows for more available stock without making the price astronomically high. Essentially, splitting stock is making multiple stocks from one main one. For example, if Company X decides to split their stock 2:1, the share would be split in half (divided by 2) and the current price of the stock would also be split in half or divided by 2. This doesn’t just apply to people who want to purchase stock, it also affects current shareholders. All of their shares would be doubled in this example. 

Stock splits do not give the company more market share or market value. They do, however, increase demand for those stocks because the stocks become more affordable to the average investor. Stock splits are not necessarily good or bad, they are neutral. Just because a company decides to split its stock, does not mean it’s not as valuable. Although, a company with a higher stock price is typically at a more prestigious level than companies with lower stock prices. 

The most common split ratios are 2:1, 3:1, and 3:2. 

Reverse Stock Split

In addition to normal stock splits, there are also reverse stock splits which decreases shares of stock which results in the price of the stock going up. Companies do this to make their stocks worth more, while lowering their outstanding shares. Reverse stock splits are similar to regular stock splits in the fact that they use ratios. Normal stock splits add shares and reverse stock splits take away.

Important Dates

There are three dates that are important when it comes to stock splits.

Announcement Date

The announcement date is the day that the board of directors will announce the stock split and all of the important details, such as the split ratio, record date and effective date. The record date is the date in which investors need to own the shares in order to be included in the stock split. The effective date or the split pay date is the date when the shares will show up in the investors accounts. 

Effective Date/Split Pay Date

This date is when the split takes effect. This is the day that the investors will be granted the extra shares. It might take a few days for those shares appear in their accounts. 

Split Ex-Date

This is the execution date of the split–the day that the new price goes into effect. Usually, this date directly follows the split pay date. 

How To Know When a Company Has a Stock Split

There are many ways to get information about stock splits and when they’re going to happen. One of the most common ways is a stock split calendar. A stock split calendar commonly includes:

  • The ex-date
  • Name
  • Symbol
  • Ratio
  • Distribution date
  • Recorded date
  • The announcement date

The Benzinga Pro Stock Splits Calendar includes all of that and an analysis of the company’s stock split. You can start a free trial to try the stock split calendar today! 

Stock splits are not good nor bad. Sometimes, they are necessary to a companies longevity. Stock splits create shares by dividing already available shares. To ensure investors are well educated and prepared for the split, taking note of the important dates and announcements is very important. 

Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.