On February 1, Alphabet Inc. 
(GOOGL), the parent company of Google, announced that its board of directors had approved and declared a 20-for-1 stock split. The split will take the form of a one-time special stock dividend on each share of the company’s Class A, Class B and Class C stock.
The split is subject to stockholder approval of an amendment to the company’s certificate of incorporation to increase the number of authorized shares of its Class A, B and C stock. If approved, each of the company’s stockholders of record at the close of business on July 1, 2022, will receive, after the close of business on July 15, 2022, a dividend of 19 additional shares of the same class of stock for every share held as of the record date.
This week’s Making the Grade revisits the mechanics of stock splits and how A+ Investor subscribers can adjust for them in the My Portfolio tool.
All publicly traded companies have a set number of shares that are outstanding. A stock split is a decision by a company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.
For example, in a 2-for-1 stock split, an additional share is given for each share held by a shareholder. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.
A stock’s price is also affected by a stock split. After a split, the stock price will be reduced (since the number of shares outstanding has increased). In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares increases and the price of each share changes, the company’s market capitalization remains unchanged.
When a company’s share price increases to levels that it believes are too high, it may do a stock split. This is because a stock split can make shares seem more affordable to small investors (even though the company’s underlying value has not changed).
Alphabet CFO Ruth Porat communicated the company’s intention of the proposed stock split. She said: “The reason for the split is it makes our shares more accessible. We thought it made sense to do.”
As of Friday’s close (February 4), Google’s Class A shares—GOOGL—were trading at $2,865.86 per share. That means an investor would need nearly $3,000 to invest in a single share of Alphabet. Based on Friday’s close, Alphabet stock would trade for around $143 per share post-split, making it more accessible to smaller retail investors.
It’s worth noting that, today, many major brokerages—including Charles Schwab, Fidelity, Interactive Brokers and Robinhood—allow investors s to buy fractional shares. That means even if an investor doesn’t want to allocate as much as $3,000 to the Alphabet stock, they can still purchase a portion of a whole share with less money, in exact-dollar amounts.
While stock splits might matter less for the sake of trade executions, they still have other benefits to companies and investors. For one, a higher number of shares outstanding means more liquidity for the stock, making trading easier for buyers and sellers and narrowing the bid-ask spread.
When a stock splits, it can also increase its price. This is because individual investors may perceive the stock as being more affordable and buy it, effectively boosting demand for and pricing up the stock.
Alphabet folded its split announcement in with its robust fourth-quarter and fiscal-2021 earnings report, so it is difficult to attribute the post-announcement price activity in Alphabet’s stock to its financial performance or the split announcement. However, Alphabet shares were up nearly 6% from their close on January 31 through the close on February 4.
When a company announces a stock split, it usually gives out two important dates to shareholders: record and ex-date. You must hold the stock at the close of business on the record date to be eligible for the split, while the actual split itself and the adjustment to the number of shares in your account takes place on the ex-date.
In the case of Alphabet, anyone holding shares of any class of Alphabet stock as of the close on July 1, 2022, will receive 19 additional shares of the same class of stock for every share held as of the close that day.
The shares will be distributed after the close of trading on Friday, July 15. Alphabet shares will begin trading on a split-adjusted basis on Monday, July 18, the ex-date.
The record date is when existing shareholders need to own the stock 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 or ex-date, the right to the new shares transfers.
Although a stock split increases the number of shares you own, it does not change your total investment value.
Let’s use Alphabet as an example.
Let’s assume you own 10 shares of Alphabet as of the close on July 15, 2022 (and that you had bought it before the close on July 1, the record date). If the price were unchanged from the close on Friday, February 4, Alphabet shares would be priced at $2,865.86 per share. This would mean your total investment is worth roughly $28,659.
After the 20-for-1 stock split, assuming shareholders approve it, you would own 20 times as many shares, or 200. However, each share is worth one-twentieth (5%), or around $143.29 (based on Friday’s closing price).
Multiplying the new number of shares owned post-split (200) by the split-adjusted price of $143.29, your investment is still $28,659.
Another version of a stock split is called a reverse split. Companies with low share prices typically use this procedure to increase their prices. A company may do this if they are afraid that their shares are going to be delisted or as a way of gaining more respectability in the market. Many stock exchanges will delist stocks if they fall below a specific price per share.
For example, in a reverse 1-for-5 split, 10 million outstanding shares at $0.50 each would now become two million shares outstanding at $2.50 per share. In both cases, the company’s market cap (share price multiplied by the number of shares outstanding) is still $5 million.
On July 30, 2021, General Electric Co. (GE) announced that it completed a 1-for-8 reverse stock split. In explaining the decision by the board of directors to initiate a reverse split, the company stated: “The purpose of the reverse stock split is to reduce the number of our outstanding shares of common stock, and to increase the per-share trading price of our stock to levels that are better aligned with companies of GE’s size and scope and a clearer reflection of the GE of the future, not the past.”
As a result of the reverse stock split, every eight shares of General Electric common stock issued and outstanding or held as Treasury shares were automatically combined into one share of General Electric common stock. This reduced the number of outstanding shares of General Electric common stock from approximately 8.8 billion to approximately 1.1 billion. Pre-split, shares were trading around $13 per share, while the share price increased eightfold post-split to more than $100 per share, meaning General Electric’s overall market cap was unaffected by the reverse split.
This is perhaps the most straightforward question to answer when it comes to stock splits because most of the time, investors should do nothing at all.
You may want to reconsider a stock you own if it undergoes a reverse split, as it often encourages more selling after the action. But with a regular split, there isn’t much more to do besides standing pat. Historically, there is a good chance that immediately following both the announcement and the ex-date, the stock will get a slight boost, so if you were thinking of selling just before an announcement, you might want to hold off a little before doing so.
If you hold a stock or ETF in a portfolio within the My Portfolio tool, you must manually adjust the purchase price and shares held to reflect the impact of splits.
Assuming I don’t sell the five shares of Alphabet I currently own before the market close on Friday, July 15, I will have to adjust both the number of shares that I own as well as the purchase price.
To edit your holdings in a portfolio you’ve created, first go to the My Portfolio tool. At the My Portfolio landing page, select the portfolio with the stocks that need adjusting from the drop-down menu. Once that portfolio is loaded, click the Modify link to the right of the portfolio drop-down menu.
From the list of portfolio holdings on the Modify Portfolio page, click on the pencil icon to the left of the holdings you wish to modify. For this example, I want to edit Alphabet, so I click on the pencil icon next to its name, which takes me to the Modify Transactions page for Alphabet.
Here we see that I purchased five shares of Alphabet on June 26, 2017, for $981.60 per share.
Pretending it is after the market close on July 15, to adjust for Alphabet’s 20-for-1 split, there are two values I will need to adjust: the shares and purchase price. To account for the 20-for-1 split, multiply the number of shares by the split factor, in this case, 20. So the number of shares I will own after the Alphabet split is 100. Likewise, the purchase price needs to be adjusted downward. Specifically, for the Alphabet split, the purchase price is divided by 20: $981.60 ÷ 20 = $49.08.
So, while the number of shares purchased and the purchase price changed, the overall transaction value has not changed at $4,908.00.
To save the changes I made, I click the Done button. However, I wouldn’t save these changes until after the split date on July 15.
A stock split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market cap (and the company’s value) does not change. As a result, stock splits help to make shares more affordable to smaller investors and provide greater marketability and liquidity in the market.
Stock splits are not as common as they once were, but they still happen. The most important thing to keep in mind is that they don’t change the value of your holding; however, they may have some influence on the stock’s performance for a while after they happen.
