Stock Split Calculator

Investors can also use the MarketBeat Stock Split Calculator to calculate what happens to their shares in a reverse stock split. In a reverse stock split, the number of outstanding shares decreases and the price per share increases.

Here’s an example. Company ABC has 8 million outstanding shares valued at $2.50 share and a market capitalization of 20 million dollars. The company issues a 1:2 split. This decreases its outstanding shares from 8 million to 4 million and increases the value of those shares to $5.00. Therefore, just as with a stock split, the market capitalization remains unchanged.

For an investor who owned 500 shares at $2.50. They would now own 250 shares at $5.00 per share. But the intrinsic value of that asset in their portfolio would still be $1,250.

A stock split is an event similar to when a company issues a dividend. By this we mean the company’s board of directors first announces its intention to split the company’s stock. At this time, the board makes four announcements:

• The stock split ratio - The most common ratios are 2:1 or 3:1. However, as shown in our prior example, companies can announce whatever split the board agrees to.
• The split record date - Like a dividend record date, this is the date on which an investor must own the stock in order to take part in the split.
• The split pay date - This is the day that the stock split takes effect and shareholders receive their new shares.
• The split ex date  - This is the day that the stock will trade at the new adjusted split price.

There are two primary reasons companies issue stock splits. The most common reason is that the company believes its shares are overpriced. For example, if the stock is trading at levels far above other stocks in its sector, it may become less attractive to investors. By lowering the share price, the company can make its stock more attractive, and accessible to more investors.

A second reason that a company may choose to issue a stock split is to increase the liquidity of their stock. Liquidity is a measure of how quickly shares can be bought or sold in the market without causing the stock price to increase. Using our earlier example of Amazon, when a stock is trading at $2,400 per share it can have a large bid/ask spread. That gives the stock less liquidity. In this case, a stock split may help make it easier for investors to buy and sell a company’s stock.

Financial professionals and economic professors generally say stock splits are meaningless because the intrinsic value of the company does not change. The value of the investment is the same, the only thing that’s changed is the number of shares an investor owns.

Still, companies do issue stock splits. And there is circumstantial evidence that some investors view the announcement of a stock split as a sign that there is interest in the stock. And there have been several examples of stocks that increase in value in the days and weeks following the initial drop following the split.