What Are Stock Splits, and Why Do Stocks Split?

When a company announces a stock split, some investors get excited. Because splits often follow extended rallies, some investors interpret them as a sign that management expects the company's stock to continue rising and wants to keep share prices accessible for retail investors. This perception can make stock splits seem more important than they really are. At the end of the day, these are mostly cosmetic corporate actions. While they can impact investor sentiment and potentially signal management confidence, they don't directly change a company's value.

Understanding how stock splits work, why companies use them, and how markets may react can help investors avoid acting on common misconceptions and focus on evaluating stocks with a more holistic approach.

A stock split occurs when a company divides its shares to increase the number of outstanding shares in the market. This lowers the market price of each new share without changing the company's market capitalization or fundamentals. Cliché or not, there's a pizza analogy that helps illustrate this concept. Stock splits are like cutting a pizza into 10 slices instead of five—there are more pieces, but the total size of the pizza doesn't change.

While stock splits can take many forms—the most common being 2-for-1, 3-for-1, and 3-for-2, they are often executed at higher ratios, particularly when a stock's price has risen dramatically. Some recent splits have created as many as 50 new shares for each original share.

A stock split becomes effective only after the company's management and its board approve the split (a decision sometimes called a forward stock split) and publicly announce it.

There's no standard timeline or price per share threshold for a stock split. Some companies split their shares regularly, while others choose to allow their stock prices to climb. Warren Buffett's Berkshire Hathaway has famously refused to split its Class A stock for decades, hoping to attract long-term investors and discourage speculators with a high stock price.

In a 2-for-1 stock split, for example, investors receive one additional share for each share they own, the stock price is halved, and the number of shares outstanding doubles. For an investor who owns 100 shares trading at $50 ($5,000 total value), a 2-for-1 stock split would leave them with 200 shares worth $25 each (still a $5,000 total value).

Many of the largest companies in the S&P 500^® Index have undergone multiple stock splits throughout their history. Here are two examples:

• Nvidia (NVDA) has completed six splits since its IPO in 1999. The latest was a 10-for-1 split in June 2024, which reduced the stock's price from around $1,200 to $120. Nvidia said it executed the stock split to make stock ownership "more accessible to employees and investors."
• Walmart (WMT) has split its stock 13 times since going public in 1970. The most recent was in February 2024 (while still on the NYSE), when it underwent a 3-for-1 split, reducing its share price from around $175 to just $58.