What is a stock split?
Companies typically initiate stock splits when their share price has risen to an unusually high level. The split is generally intended to help make the stock more affordable to a wider range of retail investors.
What happens when stocks split?
A stock split will increase the number of shares outstanding, while proportionally decreasing the price per share. Sound confusing? It’s not, really. Take a look at this example of a five-for-one stock split:
Before XYZ split:
You own 100 shares of XYZ at $500 per share for a total market value of $50,000
After XYZ split:
You’ll own 500 shares of XYZ at $100 per share for a total market value of $50,000
The important thing to notice here is that the total value of your holding hasn’t increased or decreased. The only thing that changed is you now own more shares at a lower price per share.
Sometimes stocks split in reverse
Occasionally, a company will announce a reverse split. This action raises the share price while reducing the number of shares outstanding.
Key dates to know with a stock split
- Shareholder as of date (shareholder of record): This is a little tricky, but owning a stock is not the same as being the shareholder of record. At the moment your buy order is filled at E*TRADE, you do in fact, own the stock. However, from an industry bookkeeping standpoint, you become the “shareholder of record” only when the trade settles—for most stock trades that’s two business days after the trade date. This does not restrict your ability to buy or sell stock, it’s simply the behind-the-scenes mechanics of how the markets work. However, it does mean that with regard to a corporate event, such as a stock split, dividend, or proxy vote, you are not the shareholder of record noted for the corporate event until your trade settles.
- Payable date: This is the date when the split actually takes effect and you’ll see the changes in your account. If you bought the stock at least two business days before the shareholder as of date, then you’ll see your account adjusted on the payable date.
- Ex-date: This is the date that the stock will begin trading on a post-split basis. When the market opens on the ex-date, the split adjusted prices will be shown for trading.
Stock Split FAQs
What happens to open orders?
Open orders may be adjusted, canceled, or left unchanged depending on the type of order you’ve placed. If you’ve placed an order that has been canceled, you will receive an Alert notification of the cancellation.
Note for the upcoming TSLA and AAPL stock split: You can submit a new sell order after the split has been processed, which is anticipated to take place by Sunday, August 30, 2020. When submitting a new order, please take into account the split-adjusted share quantity and price.
Orders that are not cancelled may be adjusted automatically. This is the case with an order to buy using a limit price type. A limit buy order will automatically adjust on the ex-date. For example, if you had an open order to buy 100 shares of XYZ at $50 limit and XYZ has a two-for-one stock split, your order would become a buy 200 shares of XYZ at $25 limit. However, a sell limit order will not adjust for a stock split. So, an order to sell 100 shares at $60 would remain unchanged. Customers can easily adjust sell limit orders online and make changes to the share quantity and price to reflect the new values within their account. In the above example a customer may want change the sell order from sell 100 shares at $60 to sell 200 shares at $30 when the market opens on the ex-date..
Will a stock split increase my dividends?
Although you own more shares after a stock split, there are also more shares outstanding. For dividends, that means that—provided the company’s total dividend payment amount has not changed—the dividend-per-share will be reduced by the split amount, resulting in the same total amount of dividends received. Ultimately, your dividend income is based on the company’s dividend policy, which typically is determined by its profitability each quarter.
Will the stock price rise after a stock split?
While a stock split may be perceived positively since the stock becomes accessible to more investors because of the lower price per share, a split alone does not change the market value of a company.
What happens to my options?
A stock split will result in a proportional increase in the number of option contracts, and a proportional decrease in the option;strike price. For example, if you own two $500 strike price calls on a stock that declares a five-for-one split, after the split you would own 10 call options with a $50 strike price. This adjustment will be reflected in your account on the Ex-date.
Apple has announced a four-for-one stock split, and Tesla has announced a five-for-one stock split. The stock split ex-date for both Apple (AAPL) and Tesla (TSLA) is Monday, August 31, 2020. As a reminder, the ex-date is when you will see the split reflected in your E*TRADE account(s). Here’s what that means:
For Apple Inc. (AAPL) four-for-one stock split
- If you already have a stock position:
On the morning of the ex-date, you will see four times the number of Apple shares you had on the previous night. The opening price will be one-fourth less, and subject to market fluctuation after opening.
- If you have an open options position:
On the morning of the ex-date, you will see four times the number of Apple options you had on the previous night. The strike price will be one-fourth less.
For Tesla, Inc. (TSLA) five-for-one stock split
- If you already have a stock position:
On the morning of the ex-date, you will see five times the number of Tesla shares you had on the previous night. The opening price will be one-fifth less, and subject to market fluctuation after opening.
- If you have an open options position:
On the morning of the ex-date, you will see five times the number of Tesla options you had on the previous night. The strike price will be one-fifth less.
If you trade Apple or Tesla pre-split:
If you buy AAPL or TSLA stock or open AAPL or TSLA options positions up to and including August 28, 2020, you are trading pre-split shares and options. You will have the same results as above.
If you sell AAPL or TSLA stock or close AAPL or TSLA options positions on or before August 28, 2020, you are closing pre-split positions. You will not receive any new shares or options as a result of the stock split.
If you trade Apple or Tesla post-split:
If you trade AAPL and/or TSLA stock or options on or after August 31, 2020, you are trading post-split. The share you are trading have already been adjusted for the split.
How will the Apple and Tesla stock splits affect open orders?
- Open stock orders of 100 shares or greater
Open buy orders of 100 shares or greater will be adjusted on the morning of the ex-date, August 31, 2020. For example, a stock order of 100 shares of Apple (AAPL) before the ex-date will be adjusted to 400 shares of AAPL on the morning of August 31. A stock order of 100 shares of Tesla (TSLA) before the ex-date will be adjusted to 500 shares of TSLA on the morning of August 31.
- In the case of limit orders to buy, stop orders to sell, and stop limit orders to sell, any order entered prior to market close on August 28, 2020 will be adjusted for ex-date after the market closes on August 28, 2020.
- Limit orders to sell, stop orders to buy, and stop limit orders to buy will not be adjusted, but will now be significantly away from the market price.
- The price will also be adjusted in conjunction with the split terms unless entered as a Do Not Increase order.
- Open stock orders of 99 shares or fewer
- Limit orders to buy, stop orders to sell, and stop limit orders to sell that are entered prior to market close on August 28, 2020 will be canceled for ex-date after the market closes on August 28, 2020.
- Limit orders to sell, stop orders to buy, and stop limit orders to buy will not be canceled.
- E*TRADE Corporate Services (ETCS) stock orders
Open ETCS stock orders to sell will be cancelled after market close on Friday, August 28, 2020.
- Advanced stock orders
Open advanced stock orders will be canceled before the ex-date, by Saturday August 29, 2020.
- Options orders
Open options orders will be canceled before market open on Monday August 31, 2020.
Please note: Stock orders entered after market close on August 28, 2020 will not be adjusted or canceled. Some stock orders may be rejected for aggressive pricing or invalid stop price on ex-date August 31, 2020, before the market opens.