Introduction

Investing in the stock market is like navigating a complex maze filled with jargon, trends, and strategic decisions. One of the most common terms that often catches investors’ attention is “stock splits.” You may have seen headlines about companies splitting their stock, but what does that really mean? More importantly, how does it impact you as an investor?

Let’s break it down in a way that’s easy to understand and relevant to today’s market, with real-world examples from both the U.S. and Canadian markets, focusing on how stock splits influence trading volume, investor sentiment, and potential returns.

Understanding the Basics: What is a Stock Split?

Imagine you have a $20 bill and you exchange it for two $10 bills. The total value remains the same, but you now have two bills instead of one. That’s exactly how a stock split works.

A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to existing shareholders. However, the overall value of the company and the value of your total investment remain unchanged.

The purpose of a stock split is to make shares more affordable to a wider range of investors, thereby increasing liquidity and trading volume.

How Do Stock Splits Work? Ratios and Real-Life Examples

Stock splits are typically expressed in ratios such as 2-for-1, 3-for-1, or even 10-for-1. Let’s look at an example.

Example: 2-for-1 Stock Split

• Before the split: You own 100 shares of a stock trading at $100 per share. Your total investment is $10,000 (100 x $100).
• After the split: You now own 200 shares, but the share price is adjusted to $50 per share. Your total investment is still $10,000 (200 x $50).

Even though you now hold more shares, the overall value of your investment remains the same. However, the lower price per share makes the stock more attractive to new investors.

Why Do Companies Initiate Stock Splits?

Companies don’t just split their stock for fun. There are strategic reasons behind it:

• Increased Liquidity: Lower share prices make the stock accessible to a larger pool of investors, increasing trading activity.
• Improved Affordability: Many retail investors may find high-priced stocks intimidating. A stock split allows more people to buy in at a lower price.
• Psychological Boost: Lower share prices can create an illusion of affordability, encouraging more investors to buy.
• Sign of Strength: Companies that split their stock are often growing rapidly. A stock split can signal strong past performance and future potential.

Recent U.S. Stock Splits and Their Market Impact

Stock splits have been making headlines recently, with several major companies opting for them. Let’s examine how their trading volume was affected.

• Chipotle Mexican Grill (CMG): A historic 50-for-1 stock split in 2024 made its shares much more accessible to retail investors. Trading volume surged by over 300% in the days following the split, as more investors bought in at the lower price. This excitement also led to a 5% increase in stock price within a month.
• Walmart (WMT): A 3-for-1 split in 2024 was aimed at increasing stock liquidity and accessibility for employees. Post-split trading volume jumped by 180%, signaling a strong wave of interest from retail investors.
• Super Micro Computer (SMCI): A 10-for-1 stock split scheduled for late 2024 saw pre-split trading volume nearly double as investors anticipated strong demand. Following the split, trading activity surged by over 250%, leading to a significant price increase.
• Palo Alto Networks (PANW): A 2-for-1 split led to daily trading volume doubling, boosting overall market sentiment. The stock saw a 7% increase in share price over the next quarter.

These examples highlight how stock splits can boost investor enthusiasm and liquidity, often leading to price appreciation.

Recent Canadian Stock Splits and Their Impact

While stock splits are more common in the U.S., Canadian companies have also been active.

• Canadian Natural Resources (CNRL): A 2-for-1 stock split in mid-2024 aligned with the company’s strong financial growth. Trading volume tripled, allowing more retail investors to enter the market. The stock price rose 8% within six weeks.
• Economic Investment Trust Limited (EVT): A proposed 10-for-1 stock split for early 2025. If past Canadian splits are an indicator, this could lead to a strong post-split rally. Analysts predict a potential 200% increase in trading volume based on historical data.

Historically, Canadian stocks that have split tend to experience higher liquidity and an uptick in market sentiment, especially in sectors like energy and finance.

Reverse Stock Splits: When Companies Do the Opposite

Unlike traditional stock splits, reverse stock splits reduce the number of outstanding shares by consolidating them. This raises the share price but doesn’t change the company’s overall value.

Example: 1-for-5 Reverse Stock Split

If you own 500 shares at $1 per share before the reverse split, you will now own 100 shares at $5 per share after the split.

Reasons for a Reverse Stock Split:

• Maintain listing requirements on stock exchanges
• Improve the perception of financial stability
• Avoid the stigma of being a penny stock

However, reverse splits can sometimes signal trouble, as companies in distress often use them to artificially boost their stock price.

Impact of Stock Splits on Dividends

When a company splits its stock, the dividend per share is adjusted accordingly. However, the total payout remains the same if the company maintains its dividend policy.

Example: 2-for-1 Stock Split and Dividends

• Before the split: A company pays $2 per share in dividends. If you own 100 shares, you receive $200 in total dividends.
• After the split: You now own 200 shares, but the dividend per share is adjusted to $1 per share. Your total dividend remains $200.

Is a Stock Split Good for Dividend Investors?

• If the company increases its dividend payout post-split, investors benefit from both stock price appreciation and increased income.
• If the dividend per share remains the same post-split, your dividend yield may decrease if the stock price rises significantly.
• Companies with strong growth may reinvest earnings instead of increasing dividends, meaning income investors might see slower dividend growth.

Investing in ETFs That Mirror Split Stocks

Instead of buying individual stocks that have split, investors can buy ETFs that hold these companies, benefiting from the price gains without dealing with individual stock splits or dividend adjustments.

Examples of ETFs:

• SPDR S&P 500 ETF (SPY): Holds many blue-chip stocks that have historically split.
• Vanguard Growth ETF (VUG): Focuses on high-growth companies likely to split.
• iShares S&P/TSX 60 ETF (XIU): Tracks Canadian large-cap stocks, some of which have split in the past.

Conclusion: Making Informed Investment Decisions

Understanding stock splits and their real-world impact can help you make better investment choices. While they don’t inherently change a company’s value, they can influence investor sentiment, liquidity, and stock affordability.

Historically, companies that split their stocks during periods of strong growth often see higher trading volumes and long-term price appreciation. However, stock splits alone aren’t a reason to invest—strong fundamentals and long-term growth potential remain the most important factors.

Stay informed, stay invested, and let the market work for you.

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Disclaimer: This blog article is for informational purposes only and should not be considered financial advice. Everyone’s financial situation is unique. Always consult with a qualified financial advisor or planner to assess your individual circumstances before making financial decisions.