Stock Split

What Is a Stock Split?

A stock split is a corporate action that increases the number of a company's outstanding shares by dividing each existing share into multiple shares. The stock price adjusts proportionally downward so that the total market capitalization remains unchanged. A 4-for-1 split turns one share priced at $400 into four shares priced at $100 each.

Stock splits are approved by the board of directors and announced weeks or months before execution. All financial metrics reported on a per-share basis (earnings per share, dividends per share) are adjusted retroactively to maintain historical comparability.

Why Companies Split Their Stock

The primary motivation is accessibility. When share prices climb into the hundreds or thousands of dollars, several practical issues arise. Retail investors with limited capital may feel priced out. Options trading becomes less accessible because each contract covers 100 shares. Portfolio rebalancing becomes less precise when a single share represents a large dollar amount.

Major tech companies have used splits to address these issues: Apple executed a 4:1 split in 2020 (at ~$500), Alphabet did 20:1 in 2022 (at ~$2,800), and Amazon did 20:1 in 2022 (at ~$2,400). These splits dramatically expanded the retail investor base and options market activity for these stocks.

Trading Around Stock Splits

Research shows stocks that announce splits tend to outperform modestly in the weeks following the announcement, likely reflecting the signal that management expects continued strength. However, this effect is small and inconsistent.

More actionable for traders is the impact on the options market. Post-split, options chains become more granular with smaller dollar increments between strike prices, and premiums per contract decrease. This increases options volume and can change the dynamics of gamma exposure and dealer hedging flows. Traders who use options strategies may find post-split names offer better entry points for strategies like covered calls or protective puts.