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.