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What is a stock split and how does it impact share prices?

Historical data shows stock prices rise an average 33% within the 12 months following a stock split.

When Tesla and Apple split their stocks in August 2020, newly minted traders were left with questions. What does this mean for stock prices? Plus, should I buy more or sell?

A stock split is where one stock is divided into several stocks along with its share price. As Tesla had a 5-for-1 stock split, one stock became five at one-fifth of the price, while Apple split its stock 4-for-1, with one stock divided into four. It doesn’t change the value of the stock or the company; it just means more shares are circulating the market at a lower purchase price.

Despite this fact, Tesla’s share price rallied as high as 12% in the first day of post-split trading, and Apple stocks jumped as much as 5%. While some might see it as irrational optimism, historical data collected by online broker eToro shows that such a response does make sense.

How do stocks perform after a stock split?

According to eToro data from the 10 biggest global brands that have performed a stock split over the last 60 years, prices rise 33% on average in the 12 months following. Amazon, which has performed 3 stock splits, saw prices jump an average of 209% one year later, while Microsoft rose 47% and Toyota increased by 25%.

Apple has undergone four previous stock splits in its 40-year history on the stock market, with prices rising 10% on average in a year. Following its 2005 stock split, Apple shares jumped 58%, and then 36% after its 2014 split.

Company

Number of share splits in history

Average performance of shares 12 months on

Amazon

3

209%

Microsoft

9

47%

Toyota

1

25%

McDonald’s

9

22%

Disney

8

18%

Intel

6

12%

Coca-Cola

9

11%

Apple

4

10%

Alphabet (Google)

1

-6%

Samsung

1

-13%

Of course, it’s tricky to measure how much of an impact the stock split itself had on prices compared to other factors. When Apple split stocks in 2000, its share price was 60% down 12 months later thanks to the dot-com crash. Plus, because companies usually split stocks when they’re performing well, there may be a whole host of reasons why prices soon continue to go up.

Just two of the 10 companies analysed, Alphabet (Google) and Samsung, saw prices drop on average. Alphabet, which carried out a stock split in 2014, saw its stock price fall 6% according to eToro, though this instance was a little unusual.

Google’s stock split in 2014 created two new classes of shares – Class A shares (GOOGL), which offer shareholder voting rights, and Class C shares (GOOG), which offer no voting rights.

Why do stocks rally after a split?

When companies split stock, they increase the number of shares in the market and reduce prices. More stock in the market means more liquidity, which means stocks can be bought and sold quickly, and small-scale orders won’t substantially impact share prices, hence reducing volatility.

Lower stock prices also make the stock more affordable to the masses, and it signals that the stock has been performing well. All of these factors can make the stock more appealing to investors.

As share trading platforms become increasingly popular among younger investors, including in emerging economies such as China, India and South America, lower stock prices may well become even more important.

What about fractional shares?

Anyone using a platform that offers fractional share trading, such as Stake, Hatch, or Sharesies, might be wondering what the big deal is.

Fractional share trading is where you can invest in slices of shares rather than whole shares. Rather than buying one Tesla stock for $450, you could own one-tenth of a stock for $45, or 1.1 shares for $495.

Stock splits make little difference to fractional share traders in terms of affordability. If you owned a fraction of a Tesla or Apple stock before the split, you might find yourself owning 1 or 2 whole stocks.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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