A:

If a company has undergone stock splits over its lifetime, comparing historical stock prices to those of the present day would not accurately reflect performance. For this reason, we must compare split-adjusted share prices.

The necessity of this adjusted price is best illustrated with an example. We'll use a fictional company, the TSJ Sports Conglomerate. Over the decades, this sports management company has grown a great deal and undergone numerous stock splits. When the company went public in 1988, its shares traded for $10. After some years, the company's share price appreciated to $50, and at that point the management felt that a 2-for-1 share split was appropriate, thus reducing the cost of a single share to $25. As time went on, the company continued to see a rising share price and, in accordance with the management's policy, the stock was split each time it reached $50. In total, the company split its shares four times since going public. Today, just after its last split, a single share of TSJ is trading at $25.

Because of all these splits, it is easy to see that the share price has appreciated much more than 2.5 times, from $10 to $25. In actuality, because TSJ has undergone four 2-for-1 splits, one original share in TSJ would be worth approximately $400 today!

Splits No. of Shares Share Price Total Value
1 $10 $10
Split 1 2 $25 $50
Split 2 4 $25 $100
Split 3 8 $25 $200
Split 4 16 $25 $400
Figure 1

Figure 1 demonstrates how we reach the $400 value. If you bought and held one original share of TSJ until the present day, you would have 16 shares of TSJ (first split: 1x2=2, second split: 2x2=4, third split: 4x2=8, fourth split: 8x2=16). So, even though one of TSJ's current shares is $25, one original share is worth $400 ($25*16), and therefore appreciated 40 times ($400/$10). The TSJ is a quadruple tenbagger - a very elusive investment indeed.

For discerning and analyzing the real performance of the stock, it is standard to adjust the old prices to reflect the splits. In other words, we have to find the present equivalent of the past prices. To adjust TSJ's original price ($10), we simply divide it by the stock split (2). After four times, we get the split-adjusted price.

After the first split, the original initial public offering (IPO) price of $10 would be divided by two, giving a split-adjusted price of $5.

Splits No. of Shares Adjusted Price Total Value
1 $10 $10
Split 1 2 $5 $10
Split 2 4 $2.50 $10
Split 3 8 $1.25 $10
Split 4 16 $0.625 $10
Figure 2

Figure 2 demonstrates how the original $10 price is adjusted after each split - so, after the fourth split, the original $10 price is equivalent to $0.625 today. If you were to look at a stock chart of TSJ that went back to its initial offering, the first day trading would be shown at $0.625, even though the stock never really traded at this price.

It's important to remember that the split creates no value. Notice how the column on the very right is simply the product of multiplying the number of shares by the split-adjusted price. The gain of 40 times we saw before was the result of growth, not splits.

For more information, see Understanding Stock Splits and What is a stock split? Why do stocks split?

RELATED FAQS
  1. How and why does a stock split?

    Learn why stock splits do not occur very often for individual stocks, and understand the impact of reverse stock splits on ... Read Answer >>
  2. What happens to the value of a mutual fund when a stock splits?

    Find out what happens to the value of a mutual fund when a stock in its portfolio splits, including how stock splits work ... Read Answer >>
  3. What are reverse stock splits?

    A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. ... Read Answer >>
  4. Why are some shares priced in the hundreds or thousands of dollars, while other just ...

    The answer can be found in stock splits - or rather, a lack thereof. The vast majority of public companies opt to use stock ... Read Answer >>
Related Articles
  1. Investing

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  2. Investing

    Stock Splits: A Closer Look At Its Effects

    Most trades, including short sales and options, aren't materially affected by a stock split. Still, it's important for shareholders to understand how these events impact various aspects of investing. ...
  3. Investing

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  4. Investing

    How To Profit From Stock Splits And Buybacks

    If stock splits and buybacks have been a bit of a mystery to you, you're not alone. Learn some great tips.
  5. Investing

    Don't Let Stock Prices Fool You

    Find out why a stock with a six-figure share price can still be a good value.
  6. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  7. Investing

    If You Had Invested Right After Apple's IPO

    Learn about how much a $1,000 investment in shares of Apple Incorporated would be worth if you invested at its initial public offering price.
  8. Investing

    Galena Declares 1-for-20 Reverse Split (GALE)

    Galena’s 1-for-20 reverse stock split goes ex-today, which will bump the share price by a factor of 20.
  9. Investing

    The Highest Priced Stocks In America

    These stocks don't come without a hefty price tag. But are they worth it?
  10. Trading

    What is a Covered Call?

    A covered call is a call an investor sells on a stock he already owns.
RELATED TERMS
  1. Stock Split

    A corporate action in which a company divides its existing shares ...
  2. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  3. Split-Up

    A corporate action in which a single company splits into two ...
  4. Split Payroll

    A method a business may use to pay its employees who are on international ...
  5. Split Payment

    Split payment is a means by which payment for a single order ...
  6. A-B Split

    A method of testing the effectiveness of marketing methods or ...
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center