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Should You Care About Stock Splits?

Are stock splits a boon for investors—or just a numbers game? That’s the question many investors may be pondering in the wake of 2020’s high-profile Apple and Tesla splits.

A stock split allows a company to increase the number of shares in circulation with no change to its market value, thereby making shares more affordable to individual investors. In a 2-for-1 split, for example, every share of a stock trading at $400 would be divided into two shares trading at $200.

Such splits often provide a short-term price boost as investors rush to snap up lower-priced shares. Between 2012 and 2018, for instance, large-cap stocks that split outperformed the S&P 500® Index by an average of nearly 5% after one year, according to Nasdaq.

Despite the potential for short-term outperformance, however, investors shouldn’t scramble to purchase shares of a stock just because they’re cheaper. “When a stock splits, it can feel like you’re getting a better value because your money can buy more shares,” says Steve Greiner, senior vice president of Schwab Equity Ratings®. “However, a split doesn’t change a company’s underlying health—nor does it tell you anything about its long-term prospects.”

Instead, you should focus on a company’s fundamentals when considering a prospective stock investment. “We suggest looking for companies with low debt balances, lower valuations, and strong earnings growth, which tell you more about a stock’s value than the price tag does,” Steve says.

That said, if your research points you toward particularly pricey stocks, you’ve still got options—namely, fractional shares. With Schwab Stock Slices™, for example, you can buy a fractional share of some of America’s leading companies for as little as $5. “The emergence of fractional shares all but removes the barrier of lofty share prices—and ultimately might undercut the power of stock splits going forward,” Steve says.

What You Can Do Next

Learn more about Schwab Stock Slices.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab Stock Slices is not intended to be investment advice or a recommendation of any stock. Investing in stocks can be volatile and involves risk, including loss of principal. Consider your individual circumstances prior to investing.

All corporate names are for illustrative purposes only and are not a recommendation, an offer to sell, or a solicitation of an offer to buy any security.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. For more information on indexes please see schwab.com/indexdefinitions.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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