A:

Unfortunately, no. To understand why this is the case, let's review the mechanics of a stock split.

Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors. Human psychology being what it is, most investors are more comfortable purchasing, say, 100 shares of $10 stock as opposed to 10 shares of $100 stock. Thus, when a company's share price has risen substantially, most public firms will end up declaring a stock split at some point to reduce the price to a more popular trading price.

However, to understand why this doubling of shares doesn't make a difference to an investor's equity, we need to look a bit closer at what actually happens to each shareholder's position when a stock split occurs. Let's walk through a simplified example: suppose CTC has one million shares outstanding at $80/share and then has a 2-for-1 split.

Now, consider two investors, Valerie and Marty, who each owned a stake of CTC before the split. Valerie owned 8% of the outstanding shares (or 80,000 shares) and Marty owned 2% (or 20,000 shares). When the split occurs, CTC instantly doubles the number of its outstanding shares to two million. In other words, every investor who owned shares prior to the split now owns twice as many as he or she did before. Of course, since every investor owns twice as many shares, everyone maintains the exact same percentage stake in the company. Keep in mind that when a stock undergoes a 2-for-1 split, its share price is roughly halved, so while there are 100% more shares, each is 50% lower in price.

For example, Valerie owned 80,000 shares before the split. Since there were 1,000,000 CTC shares outstanding at the time, her 80,000 shares represented an 8% stake in the company. Thus, every dollar of net income the firm earned essentially put eight cents into her pocket (though the company would probably not pay out its entire profit in dividends, but keep most of it as retained earnings for expansion).

After the split, Valerie owned 160,000 shares. However, there were also twice as many CTC shares available after the split, or 2,000,000. Thus, her 160,000 share stake is still exactly 8% of the company's equity (160,000 divided by 2,000,000), and she is still entitled to the same eight cents of every dollar of the firm's earnings. The same calculation can be performed for Marty. He had a 2% stake before the split, or 20,000 shares of 1,000,000. After the split, he has 40,000 shares of 2,000,000 - the same 2% stake.

In simple terms, you can view a company as a pie, with each investor owning a slice. When a stock split occurs, you are basically taking each investor's slice and cutting it in half. Thus, the two new slices are the same amount of pie of the previous, larger slice. Another way to view stock splits is to consider a dollar bill in your pocket - its value is obviously $1. Of course, if you were to "split" the dollar bill into 10 dimes, the value of the money in your pocket is still $1 - it's just in 10 pieces instead of one. Thus, when one of your stock splits 2-1 (or even 10-1, for that matter), there is no increase in the value of your position or the earning power of your shares, since your percentage stake in the company remains exactly the same.

(For further reading, see Understanding Stock Splits, which also includes information on reverse splits.)

RELATED FAQS
  1. Can a mutual fund's shares split?

    Learn about mutual fund share splits and why they occur, including how splits and reverse splits affect share price and total ... 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. Why would a company perform a reverse stock split?

    Understand what a reverse stock split entails, and learn what the common motivations are for a company to perform a reverse ... Read Answer >>
Related Articles
  1. Investing

    Berkshire's Stock Splits: Good Buy Or Goodbye?

    Warren Buffett's Berkshire Hathaway recently split its stock. Is this a sign to buy?
  2. Investing

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $100 during Amazon's IPO, including how the power of the stock split affects investment growth.
  3. Investing

    Understanding Stock Splits

    Find out how stock splits work and how they affect investors.
  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

    What Are Corporate Actions?

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

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  7. 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 ...
  8. Investing

    If You Had Invested In NVIDIA Right After Its IPO

    A $2,000 investment would have grown to nearly $275,000 since Nvidia's IPO in 1999
  9. Insights

    Amazon Hits $1000

    Amazon.com Inc. has hit $1000 per share, but don't expect CEO Jeff Bezos to approve a split.
  10. Investing

    The Highest Priced Stocks In America

    These stocks don't come without a hefty price tag. But are they worth it?
RELATED TERMS
  1. Reverse Stock Split

    A reverse stock split is a corporate action in which a company ...
  2. Split Adjusted

    A modification made to a security's price that takes into consideration ...
  3. Split-Up

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

    Split payment is a means by which payment for a single order ...
  5. Split Payroll

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

    A situation that refers to price differences within a series ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present values of cash inflows and outflows. Used in capital budgeting ...
  2. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
Trading Center