THE IMPACT OF A STOCK SPLIT ON YOUR PORTFOLIO

Investors often find it exciting to hear that a stock they own is about to be split, as a high share price is a problem that is commonly faced by successful and growing companies. It is important to note that even though a split does not increase the value of your investment in and of itself, a lower share price and hence an increase in the amount of liquidity in trading can certainly attract additional investors to the company. Nevertheless, investors sometimes feel confused as they wonder how stock splits affect things like outstanding market orders, dividend payouts, or capital gains taxes after experiencing an initial sense of pride. You are fortunate to live in an electronic age where most of the necessary adjustments are done for you. Even so, it is important to gain a basic understanding of how a split operates and how it may affect your investment strategy.
Stock Splits: What Are They?
If The number of outstanding shares can be increased through a corporate action known as a stock split when a company determines that its stock price is too high. Let's say RMN Corp.'s stock is trading at $1,000 per share. A 2-for-1 stock split is approved by the board of directors because the company believes that this is too expensive. Each shareholder is entitled to an additional share for each share they already own. In light of the increased number of shares, each share's value has been halved to $500 each. For example, if you owned 100 shares of RMN Corp. at $1,000 per share the day before the split, you now own 200 shares at $500 each. $100,000 remains your investment.
What Are The Steps Involved In A Stock Split?
Stock splits are splits into smaller shares. A company's market capitalization (or market cap) is calculated by multiplying the number of outstanding shares by its share price. There is simply a higher number of shares than you previously had, but the price per share has been decreased. Suppose, for example, that a company has 10,000 shares that are valued at $1,000 each. When it performs a stock split of 2-for-1, 20,000 shares will be priced at $500 per share. Investing in the company has become more affordable due to the lower share price for each additional share. This improves the liquidity of the stock, since it is easier for existing shareholders to sell or trade their shares. Due to more people buying the stock after the split, the company's value may also increase.
There Are Several Types Of Stock Splits
Stock splits can be classified according to their ratio. There are four common types of split ratios: 4-for-1, 3-for-1, 2-for-1, and 3-for-2. Regardless of the stock split's effect on the price of the shares, more shares will be priced lower in all cases. It is important to note that the market capitalization of the company remains unchanged after a stock split, regardless of the type of split. Google's parent company, Alphabet (GOOGL), has undergone a 2-for-1 stock split. The company split its stock 2-for-1 in 2014, which led to a reduction in Alphabet's share price from $1,140 to $570. Earlier this month, Alphabet announced a stock split of 20-to-one. Shareholders would receive shares at a price of approximately $130 if that split were implemented today, rather than the current price of over $2,500. Tesla is another popular example of a stock split. In 2020, the company split its shares 5-for-1. By splitting its shares, Tesla was able to reduce its share price from $2,213 per share to $442 per share, making Tesla potentially more accessible to more investors. Shares of Tesla have appreciated since then, nearly doubling in value since the split.
Here Are Some Examples Of Stock Splits
⦁    A 4-for-1 stock split has been announced by GameStop, the fairytale stock at the center of history's greatest short squeeze. The split is just one of a number of tech-related splits that have made headlines recently - and they are not all even numbers.
⦁    It has been reported by CNN Business that Tesla shareholders have approved a 3-for-1 split. The company's shares will be tripled and their value will be reduced by a third beginning on August 25. This is Tesla's second split in as many years. 
⦁    The shares of Amazon were split 20:1, as were those of Alphabet. In order to achieve this, Shopify implemented a split of 10:1.
⦁    The stock price of Apple was split seven-to-one in 2014, bringing the price down from about $140 a share to approximately $20 a share. The stock split again six years later, this time at a ratio of four to one. Over the course of Apple's history, its stock has been split five times.
⦁    Tesla's stock was split five-to-one in 2020. In response, the electric car maker's share price fell from about $2,250 per share to about $450 a share. As of Aug. 4, its value has more than doubled to $925, as yet another split, this time 3:1, appears imminent.
Advantages Of A Stock Split?
The Barrier To Entry For New Investors Has Been Lowered
Stock splits can make investing in stocks online easier for those who are just learning how to do so. It is evident that a lower share price is the most significant reason; it is easier for investors to purchase shares at a price of $100 per share as opposed to shares at a price of $500 per share. That is a significant advantage for publicly traded companies. It is also possible to attract new investors through a stock split for another reason. Stock splits are often viewed as a bullish sign, an indication that things are proceeding well for the company. Increasing investor confidence leads to more investments in the stock. While that confidence may not be warranted, from the company's perspective, it's valuable.
An Increase In Liquidity
As a consequence of stock splits, there are more outstanding shares, which increases liquidity, or the ability to convert an asset to cash. By increasing the number of shares outstanding from 10,000 to 40,000, the trading volume of the shares increases without lowering the value of the company.
Reduced Bid-Ask Spread
The bid-ask spread can also be reduced as a result of increased liquidity. In layman's terms, the bid-ask spread is the difference between the bid and ask prices. More frequent trading of stocks narrows that gap, which allows buyers and sellers to reach more favorable prices.
Increasing The Share Price Is Possible
Share prices of a company may increase as a result of stock splits. It is possible for a spike to occur simply by announcing a split. In the case of Alphabet, it recently announced that it would split its shares 20-for-1 in the future. Within the next day, its share price increased by 7.4%. A 7.4% increase in the price of a stock that trades for well over $2,500 is remarkable.
The Disadvantages Of A Stock Split?
Increases Volatility
Short-term volatility can be increased by stock splits. It is common for the new, lower share price to attract investors, thereby causing the share price to increase. Alphabet shares can rise even if a stock split is announced. It was only in the following two weeks that the initial 7.4% increase in share price disappeared.
It May Appeal To Traders And Inexperienced Investors
The purchase of shares in a single company, such as Tesla or Apple (AAPL), may be made hastily if the company splits. It is not because they understand the company's past performance and view it as a solid investment that they buy the stock at a suddenly lower price. The process of digging through a company's books is a tedious one, but it is generally a good idea when investing in one company. As a result, investing just because the share price has dropped may not be a wise decision.
Market Value Isn't Always Increased
The mere act of splitting shares does not increase the market cap of a company; it only results in a decrease in its share price. The value of a company may increase if demand increases as a result of the stock split. In this scenario, the value of each investor's stake also increases. There is, however, no guarantee that this scenario will occur. The value of a company may not increase much, if at all if there is no pent-up demand for lower-priced shares.
Reverse Stock Splits: What Are They?
The reverse stock split is the process by which a company consolidates its existing shares into fewer, higher-priced shares. Due to the fact that this is a reverse stock split, it is typically expressed as a 1-for-2 ratio, for example. There are several reasons why a company may decide to conduct a reverse stock split. There may be a decline in its share price and the possibility of being delisted from a stock exchange. As a means of attracting new investors, the company may also wish to increase its share price. The internet security company Cyren Ltd. conducted a 1-for-20 reverse stock split on Feb. 9, 2022, as an example of a stock split. At the time of the split, its shares were trading at about 20 cents per share. In the immediate aftermath of the split, its shares were trading at approximately $4. A share price of 20 cents may be considered too low by many investors to consider a company a legitimate company. Conversely, $4 appears to be a very reasonable price for a stock. This led to the decision to reverse the stock split.
What Are The Reasons For A Company Splitting Its Stock?
There are two reasons why companies conduct stock splits. 
To begin with, splitting company stock makes it more affordable for everyday investors by reducing its price by half or more. The second reason for splits is that they increase the number of shares on the market by a factor of two or more. Both Amazon and Alphabet split their shares by 20.  The addition of shares increases the liquidity of the stock. Investors will be able to buy or sell shares more quickly and efficiently when a stock is more liquid - more of its shares are traded on the open market. Higher liquidity is associated with lower risk since liquid stocks can hold their value better during periods of heavy trading.
What Is The Impact Of A Stock Split On The Stock Price?
It is common for companies to split their shares when the share price has risen to a point where new investors cannot afford to buy them. A stock's prestige and demand can be enhanced by that dynamic in terms of investor psychology.  When a company splits, previous shareholders have been rewarded with so much growth that stock prices have increased - and who wouldn't want to get on that bandwagon once admission prices have decreased? However, not all companies split their shares. Companies with a low stock price, on the other hand, are more likely to split their shares in order to attract new investors. The world's most legendary value investor, Warren Buffett, is the CEO of Berkshire Hathaway, the world's most legendary anti-splitting firm. According to the company, Berkshire's Class A shares have never been split. As of Aug. 4, the shares are trading at $442,149.
Stock splits: Who Benefits?
Stock splits don't technically add or remove a value, but they can be beneficial to the company and shareholders who could not have afforded a share otherwise. Among the stocks, Kiplinger cited was Nvidia, whose stock surged 20% between the announcement of its stock split in May 2021 and its actual split two months later in July. This kind of rapid and dramatic gain is not uncommon when news of a split breaks. There are three prevailing theories as to why this is the case, according to Kiplinger: 
⦁    Investors who were previously priced out are able to gain access to the market through lower prices, resulting in higher demand and consequently a higher price.
⦁    Investors interpret the news as an indication that the previous gains that preceded the split will continue. 
⦁    Companies use splits as signals to deep-pocketed investors that they are sitting on unrealized growth, resulting in a cascade of large purchases within a short period of time.
How Do Stock Splits Benefit Shareholders?
It is neither good nor bad for a company to split its stock. The transaction is purely cosmetic in nature and does not affect the value of the stock for either the company or the shareholders - at least not on paper. It has been mentioned previously that forward splits, which result in an increase in the number of shares and a decrease in the share price, can benefit both the company and its shareholders. Reverse splits, on the other hand, are essentially an admission that the situation is deteriorating.  Reverse splits are sometimes used by foundering companies if they are in danger of being delisted from an exchange due to their approaching the exchange's minimum share price. There are cases in which it is a media move designed to attract the attention of analysts or major investors. 
What Is The Impact Of A Stock Split On Your Portfolio?
Many investors wonder how a pending split will affect their portfolios when a company informs them. The change won't have any impact from a technical standpoint. In spite of the fact that they may enjoy the idea of owning so many shares, this feeling is only a mirage. It will still be worth the same dollar amount for them to own the same percentage of the company they did before the split. An increase in the stock price may result from a stock split, simply because more investors are interested in the stock at the new price than they were at the old price. In the short term, this can result in a price increase for the stock due to the increased demand. The price of a share will always revert to the intersection between what sellers are willing to accept for a share and what buyers are willing to pay over the long term.  
Stock Split Timing
There are three dates that must be taken into consideration when a stock split occurs:
⦁    It is necessary to be a shareholder of record on the record date in order to participate in the split.
⦁    After the split, you will be notified of the number of shares you now own on the distribution date.
⦁    In the case of a split-adjusted price, the effective date is the date on which the shares begin to trade at their split-adjusted price.
Conclusion
It is noteworthy that many major brokerages and investing platforms - including TD Ameritrade and E-Trade - still require users to only trade full shares. With the 3:1 split, the company lowers the barrier to entry and entices budget investors to invest without reducing the value of existing shares.  Despite the fact that splits do not directly improve the value of a company, they do provide a window of opportunity for growth. Watch out for stock splits in the news if you are an investor on a budget whose brokerage does not support partial-share investments. If a company splits, you may be able to buy your way into some attractive companies you would not have been able to afford otherwise.

By Rashmi Goel