How does splitting shares work

In the real world, the circumstances surrounding the split can certainly move a stock higher or lower. For example, when a company decides to split its shares in order to make shares more affordable, it can have a positive effect. This opens the stock to an entirely new subset of the investing public namely, those who previously couldn't afford even a single share , which can cause a spike in demand that pushes the stock higher.

If your broker allows you to trade fractional shares , this isn't a concern, but, for many investors, high-dollar stocks are inaccessible. Stock splits also can convey management's confidence in a stock price, which can trickle down to investors. There are three key dates investors need to know when it comes to stock splits. They are in chronological order :. Announcement date: First, the company will publicly announce the plans for the split, as well as pertinent details investors need to know.

This information generally includes the split ratio and when it will happen, including the dates I describe in the next two bullet points. Record date: This is an important date when it comes to accounting, but it isn't terribly important for investors to know. The record date is when existing shareholders need to own the stock in order to be eligible to receive new shares created by a stock split.

However, if you buy or sell shares between the record date and the effective date, the right to the new shares transfers.

Effective date: The date when the new shares show up in investors' brokerage accounts and the shares trade on a split-adjusted basis. This may sound complicated, but it's quite simple in real-world situations. On the morning of the effective date of a stock split, the increased number of shares will appear in your account, and the share price should be adjusted accordingly. To sum it up, a stock split doesn't affect the overall market value of a company all by itself.

Rather, it is simply a change in the share count or structure of a company's stock. The total combined value of the two new shares still equals the price of the previous one share. In a stock split, investors who own shares still have the same amount of money invested, but now they own more shares.

Publicly traded companies, including multi-billion dollar blue-chip stocks , do this all the time. The firms grow in value thanks to acquisitions, new product launches, or share repurchases. At some point, the quoted market value of the stock becomes too expensive for investors to afford, which begins to influence the market liquidity as there are fewer and fewer people capable of buying a share. Let's say publicly traded Company XYZ announces a 2-for-1 stock split. The most common types of stock splits are traditional stock splits, such as 2-for-1, 3-for-1, and 3-for In a 2-for-1 stock split, a shareholder receives two shares after the split for every share they owned prior to the split.

In a 3-for-1 split, they receive three shares for every share, and in a 3-for-2, they receive three shares for every two. If a company's stock price has gotten very large, many more shares could be exchanged after the split for every one prior to the split. One example is tech giant Apple. On Monday, Aug. In fact, this was the fifth stock split since Apple's IPO in Another example is Tesla, the electric car company.

Tesla split its stock 5-for-1 on Monday, Aug. Some may wonder why a company wouldn't split a stock, and a good example is Berkshire Hathaway. Over the years, Warren Buffett never split the stock.

As of market close on Aug. Buffett eventually created a special Class B shares. This is an example of a dual-class structure. The B shares originally began trading at a 30th of the Class A share value you could convert Class A shares into Class B shares but not the other way around.

Eventually, when Berkshire Hathaway acquired one of the largest railroads in the nation, the Burlington Northern Santa Fe, it split the Class B shares for-1 so that each Class B share is now an even smaller fraction of the Class A shares. Increasing the number of outstanding shares at a lower per-share price adds liquidity.

This increased liquidity tends to narrow the spread between the bid and ask prices, enabling investors to get better prices when they trade.

When each share price is lower, portfolio managers find it easier to sell shares in order to buy new ones.

Each trade involves a smaller percentage of the portfolio. More from. By Kat Tretina Contributor. Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities.

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When you had to split something as a kid, that generally didn't feel like a perk. But when you're an investor, splitting can be a good thing. A stock split is a tactic for making a stock more attainable to smaller investors, particularly when its price has ratcheted sky-high over time. When its stock began trading, that pizza was sliced into a finite number of pieces, or shares, that were offered to investors.

If a company announces a 2-for-1 split, the number of shares doubles, so the original pie will be divvied up into 16 slices.