Stocks | March 12, 2021

Should You Care About Stock Splits?

Are stock splits a boon for investors—or just a numbers game? That’s the question many investors may be pondering in the wake of 2020’s high-profile Apple and Tesla splits.

A stock split allows a company to increase the number of shares in circulation with no change to its market value, thereby making shares more affordable to individual investors. In a 2-for-1 split, for example, every share of a stock trading at $400 would be divided into two shares trading at $200.

Such splits often provide a short-term price boost as investors rush to snap up lower-priced shares. Between 2012 and 2018, for instance, large-cap stocks that split outperformed the S&P 500® Index by an average of nearly 5% after one year, according to Nasdaq.

Despite the potential for short-term outperformance, however, investors shouldn’t scramble to purchase shares of a stock just because they’re cheaper. “When a stock splits, it can feel like you’re getting a better value because your money can buy more shares,” says Steve Greiner, senior vice president of Schwab Equity Ratings®. “However, a split doesn’t change a company’s underlying health—nor does it tell you anything about its long-term prospects.”

Instead, you should focus on a company’s fundamentals when considering a prospective stock investment. “We suggest looking for companies with low debt balances, lower valuations, and strong earnings growth, which tell you more about a stock’s value than the price tag does,” Steve says.

That said, if your research points you toward particularly pricey stocks, you’ve still got options—namely, fractional shares. With Schwab Stock Slices™, for example, you can buy a fractional share of some of America’s leading companies for as little as $5. “The emergence of fractional shares all but removes the barrier of lofty share prices—and ultimately might undercut the power of stock splits going forward,” Steve says.

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