What is a split-adjusted share price?

By Investopedia Staff AAA
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!

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.

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. I get multiple mailings to my house from companies that my spouse, children and I ...

    It's not uncommon for there to be more than one investment account holder in one household. If multiple members of your household ...
  2. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. There are two ...
  3. Is a dividend reduction a signal to sell?

    Although a dividend reduction is generally viewed as a signal to sell, the decision is not as clear-cut as if the dividend ...
  4. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ...
RELATED TERMS
  1. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  2. StockCharts Technical Rank (SCTR)

    A technical ranking for stocks within a group, created by John ...
  3. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  4. Volcker Rule

    The Volcker rule separates investment banking, private equity ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its ...
  6. Story Stock

    A stock that is trading markedly higher on optimistic expectations ...
comments powered by Disqus
Related Articles
  1. Technical Top-Down Investing: Analyzing ...
    Retirement

    Technical Top-Down Investing: Analyzing ...

  2. Material Adverse Effect A Warning Sign ...
    Markets

    Material Adverse Effect A Warning Sign ...

  3. Finding Spin In The Financial Services ...
    Personal Finance

    Finding Spin In The Financial Services ...

  4. How To Analyze Restaurant Stocks
    Investing

    How To Analyze Restaurant Stocks

  5. Tales From The Trenches: Location Is ...
    Active Trading

    Tales From The Trenches: Location Is ...

Trading Center