Markets & Strategies

What Happens When a Stock Splits

Stock splits aren't as common as they used to be, but they still may have implications for individual investors.

by Teri Cettina - November 20, 2017

When you see a stock trading at close to $1,000 per share (as a number of popular technology stocks are currently doing), you may wonder: Are those stocks ready to undergo a split? And if I own those stocks and they do split, what does that mean for me?

Interestingly, stock splits don’t happen as often as they used to, says Scott Wren, Senior Global Equity Strategist for Wells Fargo Investment Institute. That shift has implications for individual investors.

Why stocks split

In essence, explains Wren, when a company feels its stock price is getting too expensive to appeal to individual investors, it can decide to do a stock split to lower its per-share price.

Let’s say you own 500 shares of company XYZ, currently trading at $100 per share. If the company were to announce a 2-1 stock split, your 500 shares of $100 stock ($50,000 total) would become 1,000 shares worth $50 each. You now own more shares, yet the amount of equity you own in the company — $50,000 — is still the same.

The stock split may not directly affect your portfolio. After all, you still own the same dollar value of shares. However, the lower-priced shares may eventually attract more buyers. That shift could drive the stock price up over time. If that happens, you could eventually benefit from the split and from the resulting share-price increase.

Why the stock split is disappearing

“Today’s reality is that stock splits are pretty uncommon,” says Wren. One reason might be that companies are less concerned than they used to be about keeping stock prices reasonable for individual investors.

“The vast majority of individual company shares are now purchased by large institutional investors, such as exchange-traded-fund (ETF) and mutual-fund companies,” he says. “They fold those individual stocks into their larger index or asset-class funds.”

Why that matters: A large investment company may not care whether they’re buying $1,000 shares of a growing health care company or double that number of $500 shares. “They’re still buying the same amount of equity in that company,” notes Wren. “Institutional investors focus on the overall equity they can purchase with a large lot of shares, not the per-share price.”

What this means for individual investors

According to Wren, the move away from stock splits offers several takeaways for individual investors.

    • Don’t wait for a split. If you’re putting off buying individual stocks in a particular company because you hope the stock will split and the per-share price will drop, don’t hold your breath. Buy stocks according to ongoing purchasing strategies upon which you and your Financial Advisor agree and that make sense for your portfolio.
    • Revisit your individual stock-buying strategy. It can be very satisfying to invest in certain companies you really like. However, individual stocks tend to be more volatile investments than aggregated funds such as an investment designed to track performance of the S&P 500® Index or Russell 2000 index. Be sure you have a well-diversified portfolio before and after you consider adding individual stocks.
    • Consider gifting differently to kids and grandkids. In the past, you may have enjoyed giving younger family members individual stocks — maybe in companies that made their favorite cereals or digital devices, for example. You can still do that, but with fewer splits happening over time, the per-share price could limit how many shares you can give.

For $14,000 (the annual gift-tax exclusion amount), you may only be able to buy 14 shares of a popular online retail company, instead of 1,000 shares if they were only $14 each. “It’s sort of a psychological barrier for some people to buy fewer shares of expensive stocks, even though the overall value is the same,” notes Wren.

You might consider gifting your kids and grandkids shares of a fund that includes brands they like, or even a socially responsible fund that aligns with your and your family’s values. They can track performance of the fund as a whole, and of the individual equities within it.

 

Teri Cettina is a personal finance writer based in Portland, Oregon, and a frequent contributor to Lifescapes.

Risk Considerations

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Exchange Traded Funds and mutual funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

Definitions

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Opinions represent WFII’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not an offer to buy or sell or solicitation of an offer to buy or sell any securities mentioned. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.