Why do stocks split?

Apple (AAPL) and Tesla (TSLA) were recently in the news as two major companies that are splitting their stock. This post explains why a company would choose to do a stock split and how this corporate action affects the investors holding the stock in their portfolio.

If you currently hold AAPL or TSLA, the stock split will have no net effect on your portfolio.

When a company splits its stock, it is not issuing any additional shares outstanding. It is simply dividing every existing share into multiple shares, such as 4 shares-for-1, 5-for-1, etc. Therefore, if you hold $100,000 worth of Apple pre-stock split, you will still hold $100,000 of Apple post-stock split, assuming no market movement. The only difference is that you will hold 4 times as many shares because they are executing a 4-for-1 split.

Companies forward split their stock when they want to keep their share price affordable.

One share of Apple was in the $400 range pre-split. Post-split, it will be in the $100 range. That is much more accessible for small investors. The more accessible a company’s share price, the more people can buy their stock and the more money that goes to the company for them to continue to grow.

Similarly, Tesla was trading in the $1,500 range before its 5-for-1 split. Post-split it will be in the $300 range.

There is no requirement that companies split their stock.

Companies may choose to let their stock price climb freely. If you have a spare $320,000, you can buy 1 share of Berkshire Hathaway’s Class A shares (BRK.A). Warren Buffet has chosen not to split BRK.A in order to discourage short-term trading.

A company can also do a reverse stock split.

A reverse stock split is the opposite of a forward stock split - the number of shares decrease and the share price increases. Often this is done because the exchange that lists the company’s stock has a share price minimum. If the stock price has decreased to where the company is at risk of no longer being listed on the exchange, they need to do a reverse stock split.

Stock splits are actually pretty boring.

Stock splits don’t change anything about the company’s actual value. In fact, they have become less common and will likely continue with that trend since more and more brokerage firms are allowing investors to trade in fractional shares. While we recommend investing in broad, low-cost index funds versus individual stocks, for those that have a “play account” and don’t want to wait around for a stock split, fractional share investing can help you purchase a partial share of a stock that would be otherwise out of reach.

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Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients nationwide and is based in San Diego. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a virtual fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.