How it works
The board declares the split ratio, a record date, and an effective date. On the effective date, each existing share is divided into the new number of shares, and the price is divided by the same ratio. Options, futures, and other derivative positions are adjusted automatically by the exchange. Reverse splits work the opposite way: a 1-for-10 reverse split combines 10 shares at $1 into 1 share at $10. Reverse splits are most common on penny stocks trying to maintain exchange listing requirements.
Example
Apple split 4-for-1 in August 2020. A shareholder with 100 shares at $500 ended the day with 400 shares at $125. Market cap unchanged at $50,000. Apple has split five times in its history (2-for-1 in 1987, 2000, 2005; 7-for-1 in 2014; 4-for-1 in 2020). One share bought at IPO and held would now be 224 shares. NVIDIA’s 10-for-1 split in 2024 followed the same pattern; the post-split price was about $120 from a pre-split $1,200.
Why it matters
Splits are mostly cosmetic but matter for accessibility: a lower per-share price increases retail participation, particularly when fractional shares are not available. Splits also signal management confidence, which historically correlated with outperformance in the 12 months after the announcement (though this signal has weakened). Reverse splits, by contrast, are usually a negative signal: companies use them to delay delisting from an exchange that requires a minimum share price (typically $1).
