Glossary

Stock splitting

A stock split increases the number of a corporation's issued shares by dividing each existing share.

Updated November 2018

shareowners will have their shares replaced with two new ones.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Unlike in a share rights issue, where additional shares are released onto the market but the existing shares remain in circulation, current shareholders are not diluted in a stock split. The ownership structure of the company does not change.

In theory, the price should adjust to take account of the split, implying that a two-for-one split of a share trading at 100p should lead to each new share trading at 50p. Stock splits are seen as a bullish sign. Usually companies only split their shares after a period of price appreciation to stop individual shares from becoming too expensive to ordinary investors (which would make them less liquid).

Advertisement
Advertisement - Article continues below

A split is therefore seen as a sign the management is confident the share price will continue to rise. Some traders like to buy shares that have just split, and sell shares that have undergone a reverse split (where a company replaces existing shares with a reduced number of new ones).

The evidence suggests that investors can indeed make money by buying shares that have just split. For example, a 2001 study by David L Ikenberry of Jones Graduate School of Management and Sundaresh Ramnath of the McDonough School of Business found that for American stocks between 1988 and 1998, newly split shares made an average return of around 9% in the year after the division.

The effect is visible outside America, too. A 2006 study by Steven Shuye Wang, Leung Tak Yan and Oliver Meng Rui found a similar result for the Hong Kong stockmarket between 1980 and 2000.

Advertisement

Most Popular

Visit/investments/investment-strategy/600709/the-coronavirus-is-scary-but-its-irrelevant-to-your
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020
Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600672/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
24 Jan 2020
Visit/economy/global-economy/600711/the-charts-that-matter-coronavirus-or-a-liquidity-air-pocket
Global Economy

The charts that matter: coronavirus – or a liquidity air pocket?

With the yield curve showing worrying signs of flatlining again. John Stepek wonders what's to blame and turns to the charts that matter most to the g…
25 Jan 2020