What is a stock split?

E*TRADE from Morgan Stanley

Image of woman doing a 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 from Morgan Stanley, 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 one business day 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 one business day 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.

So why are these dates important? In a nutshell, only official shareholders of record on the payable date participate in the stock split.

Stock Split FAQs

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.

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..

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.

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.

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.

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