In the financial market, it is common for companies to adjust their share structure to manage market value and accessibility. These operations are known as stock splits.
1. What is a stock split?
A stock split is a corporate action that increases the number of shares outstanding. This is achieved by issuing new shares in a specific ratio, which reduces the value of each individual share.
For existing shareholders, this means you receive more shares at a lower price per share, but the total dollar value of your holdings remains the same as it was before the split.
It is important to understand that while the number of shares changes, the total value of your investment and the company's market capitalization do not change.
A simple way to look at it: If you exchange a $10 bill for ten $1 bills, you have more units, but you still have the same amount of money.
Stock Split (Forward Split)
Occurs when a share price is very high and the company decides to increase the number of shares to reduce the individual price.
Its purpose is to make the stock more accessible to retail investors and improve the company's liquidity in the market.
Example: If you own 1 share of a company worth $1,000 and the company announces a 2-for-1 split, you will then own 2 shares worth $500 each.
Reverse Stock Split
Occurs when a share price is very low and the company decides to reduce the number of shares to increase the individual price.
This is generally done to meet the minimum listing requirements of stock exchanges or to improve the perceived value of the company.
Example: If you own 10 shares worth $1 each and the company performs a 1-for-10 reverse split, you will end up with 1 share worth $10.
2. How does this affect the shares you already own?
If you already hold shares in a company that announces a split, you do not need to take any manual action. The adjustment will be reflected automatically in your Wallbit investment account.
Position Value: The total dollar value of your investment remains the same at the exact moment of the split.
Number of Shares: You will see the number of shares in your portfolio increase or decrease depending on the type of split executed.
Average Purchase Price: Your entry price will be adjusted proportionally so that your unrealized gains or losses remain accurate.
When a split occurs for a stock you own, you will see two transactions with the same date:
Negative movement corresponding to the removal of your pre-split shares.
Positive movement corresponding to the deposit of your new post-split shares.
*VUG corresponds to the Vanguard Growth Index Fund
**In both cases, the value represents the number of shares in your portfolio. Remember that the monetary value of your investment remains the same while the quantity of shares is updated.
3. Difference between a stock split and fractional shares
It is common to confuse these terms, but they operate differently. A stock split is a corporate decision that affects all shareholders equally. The company decides to divide its shares to adjust the market price, modifying the number of units in your portfolio. Even if you see more shares, the total value of your investment never changes.
On the other hand, fractional shares are an investment tool that allows you to purchase portions of high-value stocks that retail investors might otherwise be unable to afford.
Of course, with your Wallbit investment account, you can invest in fractional shares starting from as little as $1.
Note: Please keep in mind that following a split, the market may experience price volatility as investors react to the news.