Stock splits are hot with companies like Walmart, Nvidia and Chipotle, each announcing one this year so more people can afford to buy their shares. But should you?
It depends on whom you ask.
Some analysts say stocks that split tend to outperform the broad market Standard & Poor’s 500 index in the 12 months following the split announcement. Others say a stock split isn’t a reliable indicator of whether a stock’s value will increase or decrease over time.
It’s not necessarily the split that makes the stock’s price rise, said Peter Ricchiuti, senior professor of practice at Tulane University’s Freeman School of Business. “Stocks splitting are companies that are doing very well so it’s natural the stock will continue to go up,” he said.
How do stock splits work?
There are two kinds of stock splits:
- Forward splits decrease the share price and proportionately increase the number of shares outstanding. They usually occur in ratios. For example, a 2-for-1 stock split means a shareholder would own double the number of shares, each worth half as much, so your investment value remains the same.
When people talk about “stock splits,” they’re typically referring to these. They’ve dominated this year, with Nvidia, Broadcom, Walmart, Chipotle and William Sonoma among them.
- Reverse splits increase the share price and proportionately reduce the number of shares outstanding, so your investment is unchanged. For example, in a one-for-four reverse split, every four shares become…
