At the close of a stock split, you end up with more shares than you originally owned. A stock split starts with an announcement from the company’s board of directors. To take part in the split, you must own shares in the company before the split cut-off date. One reason companies split their stock is to reduce the per share price to attract new investors. The stock split is completed after the additional shares are distributed and the stock begins trading at the new adjusted price.
The initial announcement releases information about the stock split ratio, the record date, the split pay date and the split ex-date. You must own the stock by the record date to take part in the split. Although the board can select any stock split ratio, the most commonly used ratios are a two-for-one split or a three-for-one split. With a two-for-one split ratio, you receive two new shares for every share you own. A three-for-one split ratio gives you three new shares for every one you own.
Split Pay Date
The split day date is the date that the stock split takes effect and the new shares are transferred to the stockowners. The company’s stock transfer agent is responsible for making sure that the correct number of shares is transferred to each owner. If your shares are held electronically, your broker makes a notation in your account based on the information provided by the transfer agent. You can check your account to confirm that an entry was made indicating that the shares were deposited into your account. If you want to hold the shares personally, the transfer agent will mail the stock certificate to you.
The split ex-date is the date the stock starts trading at the new adjusted split price. If the price was at $90 and the split is two-for-one, the price is halved to $45. With a three-for-one split, the $90 price is divided by three, making the new trading price $30. The trading price is updated on whichever exchange the stock trades, such as the New York Stock Exchange or NASDAQ. There may be a period of increased buying as investors purchase shares at the new lower price.
Split Effect on Stock Value
Although a stock split increases the number of shares you own, it does not change your total investment. For example, if you own 100 shares of stock with a $50 per share price, your total investment is worth $5,000. After a two-for-one stock split, you own twice as many shares, or 200, but each share is worth half of the original amount, or $25. However, your total investment remains unchanged at $5,000. Should the stock return to the pre-split price of $50, your investment would be worth $10,000, which is your 200 shares multiplied by the $50 share price.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.