Military Finances 101: What Are Stock Splits?

Back when I was in a Fighter Squadron, there was plenty of investing talk that went on around the "water cooler". The term “stock split” may be one of those financial terms that you’ve heard or will hear but not understand, but stock splits are quite simple. Understanding them can be valuable for any investor. Let's explore what stock splits are and why they matter for investors.

What Is a Stock Split?

A stock split is exactly what it sounds like: a company splits its existing shares into multiple new shares.¹ The company's total value remains the same, but the number of shares increases, and the price per share decreases proportionally.

Imagine owning one share of a company priced at $100 per share. If that company decides to do a 2-for-1 stock split, you would then own 2 shares, each priced at $50. The value of your investment remains the same: 1 share × $100 = 2 shares × $50.

Why Do Companies Split Their Stock?

There are a few reasons why companies may decide to split their stock. Here are a few:

Liquidity
A lower stock price can make shares more accessible to a broader range of investors. Some investors may be more inclined to buy company shares at $50 rather than $100.

Psychological impact
Psychologically, a lower stock price can make shares seem more affordable and attractive to retail investors.

Increased Trading Activity
With more shares available, trading volume often increases. This heightened activity can sometimes lead to increased liquidity and volatility, which can be appealing to both the company and investors.

Types of Stock Splits

There are a few different types of stock splits, including the following:²

2-for-1 Split
A 2-for-1 stock split is the most common type, in which each share is split into 2 shares. For example, if you had 100 shares before the split, you would have 200 shares after.

3-for-1 Split
With a 3-for-1 split, each share becomes 3 shares. If you had 100 shares, you'd end up with 300 shares.

Reverse Split
A reverse stock split is the opposite, in which multiple shares are combined into one. Struggling companies may do this to increase their stock price, as it can make the shares seem more valuable.

What to Know about Stock Splits as an Investor

For investors, the impact of a stock split is primarily psychological and technical. Here’s what to know:

A stock split does not change the total value of your holdings significantly. If you owned $10,000 worth of shares before a 2-for-1 split, you still own approximately $10,000 worth of shares after.
Stock splits sometimes result in increased liquidity, which can be beneficial for those looking to buy or sell shares.
If you're trading options on a stock that undergoes a split, the terms of your options will likely be adjusted to reflect the new share count and price.

Real-World Examples of Stock Splits

Many well-known companies have executed stock splits over the years:

Apple: In 2020, Apple executed a 4-for-1 split, making shares more affordable for individual investors.³
Tesla: Tesla has also split its stock multiple times, including a 5-for-1 split in 2020.⁴
Google (Alphabet): In 2014, Google executed a 2-for-1 split.⁵

Stock splits are common in the financial markets, yet they can confuse investors who don’t know how they work. Understanding that a stock split is primarily a cosmetic change, increasing the number of shares while decreasing the price per share is key. For investors, the value of their holdings remains the same, but the potential for increased liquidity and accessibility can be appealing.

Military Finances are Different

The stock market doesn't care if you're a civilian or an active or retired military member. That isn't always the case. Senior Military Officers and NCOs, whether Active or Retired, have unique financial benefits and tax code carve outs. That's why we think you should work with a financial advisor that works with people just like you each and every day. If you'd like to see how we work with Active and Retired Senior Military Officers and NCOs, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Military Finances 101: How to Build a Bond Ladder

Military Finances 101: What Are Real Estate Investment Trusts?

Military Finances 301: Investing in Times of High Inflation

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.