Stock splits and fractional shares

A stock split is a corporate action​​ that describes when a company reduces its price per share and simultaneously increases the existing shares.

For example, if a stock is trading at $100 and there is a two-for-one (2/1) split, for each share that you own, you will end up with two shares worth $50. There is no change in value; if you owned 200 shares at $100, you would now own 400 shares at $50. The value of the shares in dollar amount is the same, which stays at $20,000 in both cases.

In terms of what happens with the company, its market capitalisation (share price x number of shares outstanding) will stay the same as before the stock split. Its share price may be reduced but the number of shares outstanding increases proportionately.

There are various split ratios that can occur. A company could give 1.5, 2, 3 or 10 shares for each share outstanding, resulting in a split ratio of 1.5/1, 2/1, 3/1, or 10/1. The company can pick any ratio it desires to achieve the target share price.

Reverse stock splits work in the opposite way to traditional stock splits, in that they reduce the number of shares outstanding while increasing the stock price. Companies with falling stocks prices will often do this to make their shares look like they are worth more.

Once again, the company determines the split ratio. It could be 1/2, 1/10 or any other ratio. For example, let’s assume that a company has seen their stock price fall from $20 to $0.50. While it has dropped considerably, which may attract a few buyers, the low price may scare off other investors. These wary investors may question why it has become a penny stock​​ and decide not to trade.

If the company does a 1/10 stock split, for every 10 shares you own, you will end up with one, but that one share will be worth 10 times as much. In this case, the share price will increase to $5 (from $0.50) and the number of existing shares is divided by 10.

Similar to an original stock split, trading charts are adjusted to reflect the reverse split ratio. For example, if a stock has a 5/1 split, all historical price levels are multiplied by five so there is not a large one-day jump on the chart when the reverse split occurs.

While reverse stock splits can make a stock appear worth more, unless the company does something to turn their situation around, their stock price is likely to keep falling as it was before. Therefore, caution should be taken when traders are considering investing in stocks that have recently had a reverse split, as this may result in losses over the long-term.

Fractional shares are created when there is a stock split that results in shares getting cut into fractions. These can also be the result of automatic dividend reinvestment plans. The dividend amount may only be enough to buy a fractional share, which is credited to the investor’s account.

Some stockbrokers also offer fractional share trading so that investors have easier access to high-priced stocks. Fractional share trading​​ means that an investor can buy a portion of one share, as opposed buying a full share or many shares. Investors typically utilise fractional shares in stocks and exchange-traded funds​ (ETFs) with a high price tag.

Fractional shares are a portion of a full share, which allow people to choose a dollar amount they wish to invest as opposed to the number of shares. For example, if a stock is trading at $100 and a trader wants to invest $150, they could buy one full share and one-half share. If fractional shares are not available to trade, this person would have to decide between investing $100 (one share) or $200 (two shares). Fractional shares allow people to invest the amount they want.

With fractional share investing, a portion of a share is bought and sold like a full share through brokers that offer this functionality. If you end up with a fractional share due to a stock split, it can be sold along with other shares.

There have been many famous stock splits in recent history, including large companies such as Apple, Tesla and Amazon. For example, in 2020, Apple had a 4/1 stock split. This coincided with a short-term top in the share price. The price fell more than 20% after the stock split but recovered the loss over the following several months.

One company with a large number of stock splits is Walmart, which has had 11 stock splits in its history. The latest one occurred in 1999. Following this split, the stock moved sideways for the next five months before moving definitively back to the upside.

Stock splits should theoretically have no effect on how a stock perform, since there is no change in value. However, if this was true, then companies would not decide to make a stock split. One benefit to investors of a stock split is that the stock price is reduced and becomes more attractive to a wider audience, which may, over time, boost performance. However, reverse stocks splits are often not as beneficial unless the company can do something about why their stock was dropping so much in the first place.

A drawback to a stock split is if the company is already unpopular and the process is seen as an unnecessary attempt to boost the stock’s performance. These types of actions cost money as they require board approval, filing paperwork and lawyer fees.

Stock splits are often announced beforehand or can be predicted by investors that are monitoring a company’s share price that is unusually high. For up-to-date news on shares and the stock market, our news and analysis section provides daily coverage inside the Next Generation platform. For individual stock coverage, live account users also have access to Reuters news feed, analyst insights and Morningstar research reports. After registering for an account, you can find these exclusive resources on the News & Analysis tab. You can also monitor our economic calendar for regular updates.

Fractional shares are purchased and sold through participating brokers. While trading in fractional shares is gaining some popularity, most traders, investors and brokers still deal in full shares. Fractional shares are useful for very small accounts but are not often a major consideration for traders putting more than a few hundred dollars into most stock transactions.

In summary, stock splits can be beneficial for companies that are looking for their shares to be more accessible, without the hefty price tag. You can practise your share trading strategies by opening an account to spread bet or trade CFDs on more than 8000 shares and ETFs on our advanced platform. In particular, spread betting is tax-free in the UK*, although there are still costs associated, such as commissions and overnight fees. Read more about our trading costs​. It is particularly important to understand how corporate actions have an effect on your spread bet and CFD positions.

Regardless of whether your positions end up as fractional shares or remain as full-size equity shares, risk-management is important for every trade. Two risk-management techniques that traders and investors often use are stop-losses and position sizing. A stop-loss​ is an order instruction to exit if the trade goes the wrong way by a certain amount. It makes sure that losses are capped and they do not continue running. Position sizing involves monitoring how much of your total capital is put into each stock, as it is considered less risky to spread it out over more trades. This way, even if one stock drops in value, the whole account isn’t tied to that position.