While not used very much at all these days, stock certificates were a common form of proving stock ownership in the past. A stock certificate is the physical piece of paper that represents ownership in a company. The certificates include information such as the number of shares owned, the date when purchased and an identification number.
When a stock splits, the company divides its existing shares into multiple shares in an attempt to boost the liquidity of the shares. Nowadays, if you still own paper certificates, you will nevertheless be registered with the company as a shareholder of record and will receive your newly issued shares electronically.
- A stock certificate is a physical piece of paper that represents a shareholder's ownership in a company.
- When a company undergoes a stock split, shareholders of record receive new shares for every existing share they own.
- Today, these new shares are automatically issued electronically but additional paper certificates can be requested from the issuer or transfer agent.
Why Stock Certificates are Largely Unaffected by Splits
Stock splits have little effect on the holder of stock certificates. In most cases when an investor purchases shares in a company, they are never actually held in paper form by the investor or the investor's brokerage firm. Instead, the shares of a company are held in electronic form and registered with the company's transfer agent. However, investors do have the right to obtain the shares in paper form, referred to as stock certificates. If your shares are held in paper form, you will still be registered as the holder of record with the transfer agent.
You, as the holder of stock certificates, will continue to hold your certificates. At the time of the split, the company's transfer agent will add the split-adjusted shares to its records. These additional shares will be in electronic form on the transfer agent's books, and stock certificates will generally not be issued at the time of the split.
For example, if a company instituted a 2-for-1 stock split, it would mean that for every one share you hold in the company now, you would receive an additional share. If you held 100 shares prior to the split, you would own 200 shares after the split. But don't get too excited, the price per share will be cut in half, making everything even out. If those 100 shares were held as stock certificates, you would retain those shares and not be required to return the certificates. Your additional 100 shares in the company would simply be registered to you by the transfer agent.
In other words, you would hold 100 shares in physical stock certificate form and an additional 100 shares would be held in electronic form by the transfer agent. If you wanted to receive the additional 100 shares in paper form, you would just need to ask the transfer agent to send you stock certificates. Likewise, if you wanted to convert your paper certificates to electronically-represented shares you could exchange them with a stock broker.
The Bottom Line
The only thing that happens to your stock certificates in the event of a stock split is that each individual certificate becomes worth less than before, but you gain additional shares that are given to you in electronic form. There's no need to send your certificates back or rip them in half to sell them. Companies tend to make stock splits as easy on investors as possible.