Everything you need to know about stock splits

The background to stock splits – including what they are, why companies do them, and how they affect the value of your investments.

What is a stock split?

A stock split lets a company increase the number of shares it has in circulation, but they also decrease the share price by a proportionate amount. This means that the company’s market capitalisation remains the same, and the respective value of any stock that you own in the company does not change.

What does a stock split do?

Let’s use NVIDIA as an example. A 10:1 stock split means that for every share you held before the split, you’ll get nine more after the split – so if you held one share before the split, you’d own 10 after the split. This means that after the split, there will be 10 times as many shares in circulation, and the stock price after the split will be a tenth of what it was before the split.

An easy way to express this is that the number of shares will be multiplied by 10, and the share price will be divided by 10.

So, hypothetically speaking, if the company’s stock is currently priced at £1,000 a share and there are 1,000,000 shares in circulation, after the split the stock price will be £100 a share and there will be 10,000,000 shares in circulation.

Why do companies do stock splits?

A company’s leadership might decide to do a stock split to make the company’s shares more accessible to the public. For example, £1,000 a share might be out of reach for some people, but £100 a share is more accessible.

For current shareholders, this can be a benefit because their investment in the company hasn’t actually decreased in value, and they haven’t lost any money. Instead, a lower share price will increase the liquidity of the stock as its price has become more accessible for a wider pool of investors.

How do stock splits affect your investments?

If you have shares in a company that performs a stock split, you’ll notice a few things happen to the value of your investments. Firstly, each share that you own will decrease in value. This could be alarming when you first see it – especially if you didn’t know that a stock split was happening.

But, the next thing to remember is that for each share you owned before, you will have been issued more. So although the value of each share has gone down, the number of shares that you own in that company will have gone up.

In real terms, this means that the relative value of your investments has not changed (excluding usual market movements).