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Stock splits of $Tesla, Inc.(TSLA.US)$ and $Apple Inc(AAPL.US)$ have attracted much attention of investors over the past month, whose shares prices surged sharply before splits went into effect. In this course, we are going to learn more about stock splits.

What is a stock split?

When a stock splits, let's say by a 2 for 1 (or 2:1) ratio, the number of shares is doubled and the price is cut in half. The market valuation of the company (= number of shares x price per share) remains unchanged by this event. Even more importantly, the value of my holding is unchanged by the split.

Let's say I hold 100 shares of XYZ stock and the stock price is $500; the value of this holding is $50,000 (100 x $500). When the stock splits, I now have 200 shares and the price is $250; the value of this holding is still $50,000 (200 x $250).

In the case of a reverse split (1:2), the number of shares is halved and the price doubles. For example, I now have 50 shares and the price is $1,000. Again, the value of the holding is $50,000 (50 x $1,000).

What do stock splits mean for investors?

Stock splits change the number of shares outstanding and the price per share, but they do not change a company's market capitalization or signal a change in the company's underlying fundamentals. Existing shareholders will see that they own more shares, but each share is worth proportionally less. The total value of an investor's position in that company doesn't change due to the split.

One thing that does change for existing shareholders is their per-share cost basis. If you decide to sell shares sometime after the split, you would have to adjust that cost basis proportionally to calculate your capital gains properly. Say you purchased 20 shares of Apple prior to the split for $8,000, which equates to a per-share cost of $400. The split then converts your 20 shares into 80 shares, and that reduces your per-share cost to $100.

Why does the stock split happen?

A single share becomes more affordable and accessible to more investors as the result of a stock split. More investors who can buy a share (or hundreds of shares) may result in higher demand for the stock. Higher demand drives stock prices to further increase. A higher price means that this holding is more valuable.

But, to be clear, this sequence of events (split, more affordable per share prices, higher demand, higher per-share prices) is not guaranteed to happen. There's simply the possibility that it could happen. What's important to know is that the underlying value of the shares hasn't changed at all.

A reverse split bolsters the per-share price. That is, if a stock's price is $1, then a 1-for-10 reverse split would increase its price to $10. At the same time, the number of shares would be reduced by one-tenth. The reasons for reverse splits may include raising the price high enough to avoid being removed from a stock exchange.

So, a stock split or a reverse split allows a company to engineer its share price and/or the number of outstanding shares without actually changing its value.

How to look up a company's stock split history on Moomoo?

It can be done by just a few clicks (take Apple for example):

1. Search the ticker 'APPL'

2. Select 'Apple Inc' to go to the quotation page

3. Find the 'Profile' tab and it will show the historical stock splits

For more investment knowledge and trends, welcome to Courses on the Community.