When stocks go up in price, it can be both good and bad for the company involved. A price increase indicates a vote of confidence in the company and its prospects. But if the price gets too high, it can be difficult for new investors to buy blocks of shares. For that reason, companies often issue 2-for-1 stock splits to make those shares more affordable.
Share Price
When the company declares a 2-for-1 stock split, the share price of the stock is cut in half on the day the split goes into effect. But because the number of shares the stockholder owns doubles, there is no net effect on the total value of the holdings. For instance, if the stock closes at $50 the night before the stock split, it will open at $25 the next day. If the stockholder owned 100 shares of that stock before the split, that stockholder now owns 200 shares of the newly priced stock.
Cost Basis
When a company whose stock you own declares a 2-for-1 split, it is important to adjust your cost basis. To adjust the cost basis, simply find your original purchase confirmation and divide the price you paid by two. Also, multiply the number of shares shown by two. While the amount you paid for the stock is not impacted by the stock split, the number of shares you own is, and it is important to track that figure so you report the proper gain or loss to the IRS when you sell.
Stock Price
While the 2-for-1 stock split itself will not impact the value of the stock, these splits often are viewed as positive signs for the companies that issue them. Stock splits commonly are performed when the stock has experienced a rise in its price for an extended period. When the split occurs, you might see a temporary spike in the value of the stock. If you have been looking for a time to sell the stock, you might want to use this opportunity to sell some of your shares.
Historical Information
You can find historical information about stock splits from a variety of sources, including financial publications and the Internet. Knowing how many splits a stock has had can be valuable information when you are looking for a stock to buy. While the presence of a stock split alone is not enough to recommend a stock, a company whose stock has appreciated to the point where a 2-for-1 split was necessary can be an attractive buy.