A Comprehensive Guide to the History of Stock Splits

Stock splits have been a part of the stock market since the early 20th century. The first stock split was in 1920 by the General Motors Company, which split its stock 5-for-1.

This was a significant event in the history of stock splits, as it set the stage for future splits. Companies like IBM, Coca-Cola, and Microsoft have all followed suit, using splits to make their stocks more attractive to investors.

The idea behind stock splits is to make the stock price more affordable and appealing to a wider range of investors. By reducing the stock price, companies can increase the number of shares outstanding, making it easier for small investors to buy in.

Companies issue shares for various reasons, but one of the most common is to make their stock more attractive to investors.

A stock split is often compared to cutting a pizza into smaller slices – you have more pieces, but not more pizza. This means that the total market capitalization, individual ownership stakes, and fundamental value of the company remain unchanged.

However, research has shown that stock splits can result in short-term abnormal returns, with companies experiencing an average 2% to 4% increase in value around the split announcement.

Companies might split their stock to keep the share price within a perceived best range that balances the needs of different investor types. This is because specific prices might appear strange or outlandish to investors.

Some of the reasons companies issue shares can be broken down into the following:

Stock splits can have a significant impact on a company's stock performance and investor behavior. A stock split can increase liquidity, making it easier for investors to buy and sell shares.

Companies often choose to split their stock when the price is high, making it expensive for investors to acquire a standard board lot of 100 shares. This can be a major barrier to entry for new investors.

The advantages of a stock split are numerous. They include increased liquidity, attractive to new investors, improved perceived affordability, and flexibility for investors.

However, there are also some potential downsides to consider. A stock split can result in increased volatility, and there are costs associated with doing the split. The market reaction to a stock split can also be unpredictable.

Here are some of the key advantages and disadvantages of a stock split:

In the UK, a stock split is also known as a scrip issue, bonus issue, capitalization issue, or free issue.

In 1920, the first stock split in the US took place with the General Electric Company, where the stock price was split from $110 to $55.

The first stock split in the US was a 2-for-1 split, which occurred in 1920 with General Electric. This type of split increased the number of shares outstanding, making the stock more affordable for individual investors.

The 1982 stock split by Coca-Cola is a notable example, where the stock price was split from $9.50 to $4.75, making the stock more accessible to a wider range of investors.

Let's take a look at Apple, a company that has undergone several stock splits in its history. Apple split its shares four-for-one in August 2020, which means that each share was trading at around $540 before the split, and after the split, the price per share dropped to $135.

This split resulted in Apple's outstanding shares increasing to over 15 billion, while the market capitalization continued to fluctuate. For instance, in September 2024, Apple's market capitalization rose to over $3 trillion.

To convert a quantity of pre-split shares to post-split shares, you can multiply the ratio value of each split together. For example, if you owned a single pre-split Apple share in 1987, it would have eventually been split into 224 shares after the 2020 split, which is determined by multiplying four, seven, two, two, and two.

Here's a breakdown of Apple's stock splits in its history:

By examining Apple's stock split history, we can see how the company has used stock splits to make its shares more affordable for individual investors and increase liquidity in the market.

Reverse stock splits can be a bit tricky to understand, but essentially, they're the opposite of a regular stock split. A reverse stock split combines two or more shares into one share.

Companies might choose to do a reverse split if their shares are performing poorly and risk getting delisted from major exchanges like the NYSE or Nasdaq. For example, General Electric (GE) did a 1:8 reverse stock split in 2021, reducing its share count from about eight billion shares to one billion and increasing the share price eightfold, from about $5 to $40 per share.

Reverse splits can be seen as bearish, as they might be a way for companies to artificially drive up their stock price. However, they can also be a necessary move to stay listed on major exchanges.

In a stock split, there are three pivotal dates that investors should be aware of: the announcement date, the record date, and the distribution date.

The announcement date is when the company publicly declares its intention to split its stock, often causing an immediate market reaction. This is usually the first time investors hear about the split, and it's a good idea to pay attention to the news.

The record date is the day the company determines which shareholders are eligible to receive the additional shares from the split. Investors must own the stock before this date to participate in the split.

The distribution date is when the new shares are actually issued and begin trading at the post-split price. This is the day when the split takes effect, and the new shares become available for trading.

Here are the key dates in a stock split:

Some companies, like Berkshire Hathaway, have never split their stock. Its Class A shares have traded at over $675,000 per share.

Home Depot (HD) has a remarkable history of growth, with 13 stock splits in less than two decades. The frequency of these splits, particularly in the 1980s and 1990s, reflects the company's expansion of retail operations across the U.S.

An original share bought before the first split in 1982 would have grown to about 342 shares, demonstrating the company's long-term growth.

Home Depot carried out splits pretty often in the years after it went public, with some notable splits including:

These splits show that Home Depot has consistently worked to make its stock more accessible to investors, while also reflecting the company's significant growth and expansion.

Apple's stock split history is a great example of how a company's valuation remains unchanged despite a stock split. Apple's initial public offering (IPO) was on Dec. 12, 1980, with an IPO price of $22.

The company has initiated five stock splits in its history, with the latest one making the stock price $0.10 per share when adjusted for the splits. Apple's current market cap is over $3.7 trillion, making it one of the world's most valuable companies.

Investors often get excited about stock splits because they believe they make the stock cheaper, but the valuation usually remains unchanged. Apple's market capitalization and enterprise value haven't changed due to the stock splits.

Calculating the cumulative effect of a company's stock splits over time begins by identifying each split event to determine its impact on share count and price.

To do this, you apply each split ratio consecutively to the original share count. For example, if a company has had a two-for-one split followed by a three-for-one split, the original number of shares would be multiplied by six.

Stock split ratios are often 2:1, 3:2, and 3:1, but companies like Amazon and Alphabet have also done larger splits, such as 20-for-1 in 2022.

Calculating a company's stock splits can be a bit tricky, but it's actually quite straightforward once you understand the process.

The first step is to identify each split event and determine its impact on share count and price. This involves looking at the split ratio and applying it to the original share count.

For example, if a company has had a two-for-one split, the original number of shares would be multiplied by two.

Stock split ratios are often more common than you'd think, and they come in various forms. The most common ratios are 2:1, 3:2, and 3:1, according to FINRA.

Apple split 4:1 in 2020, giving investors more shares to work with.

From an investor's perspective, stock splits can be a positive sign for a company's prospects. Historically, bullish outcomes tend to follow stock split events, often in the form of higher earnings expectations and sometimes earnings growth.

However, it's essential to remember that nothing is certain in the world of stock picking. Some active traders used to buy a stock a few weeks before the split and sell it just a few days before the actual split, but this tactic is no longer reliable.

A stock split doesn't fundamentally change the underlying value of the company or its shares, but it can have a psychological impact on investors. Many view stock splits as a positive signal about a company's prospects, as the decision to split is often made when a company's management believes the company is performing well and has potential for continued growth.

According to a Columbia University study, stock splits tend to generate "abnormal returns." Analysts tend to bump up their earnings forecasts after a stock split, and these companies tend to see better future earnings growth for up to two years after the split, as compared to their peers.

A stock split can also increase affordability and make a company's stock more accessible to a broader range of investors. This can lead to improved liquidity and higher trading volume, making it easier for investors to enter or exit positions in the stock.

Here are some key benefits of stock splits from an investor's perspective:

As with any investment decision, it's essential to do your research and consider multiple factors before making a decision. A stock split can be a positive sign, but it's not a guarantee of future performance.