Stock Splits Unveiled: How Your Investment Stays the Same

Written by Rakshita Bucha Jain

Think of a stock split like slicing a big cake into smaller pieces. Imagine you’ve got a delicious cake that’s big enough to serve a handful of people. But what if you want to share that cake with more friends? Instead of everyone getting just a small slice, you cut the cake into more pieces so everyone gets a fair share

Before the Split: The Whole Cake

Let’s say you have a cake that represents your total investment in a company. If the cake is cut into 8 big slices, each slice represents a share of the company. If each slice (or share) is worth $800, and you own 10 slices, your total cake or investment is worth $8,000.

The Split: Cutting the Cake into More Pieces

Now, imagine the company decides to cut the cake into 4 times as many slices. This is similar to a 4-for-1 stock split. If each of your original 10 slices is now divided into 4 smaller pieces, you end up with 40 smaller slices. However, each of these new, smaller slices would be worth only $200.

So, after the split, you’ve got more pieces of cake, but each piece is smaller. Your total amount of cake remains the same, you still have the same total value of $8,000 but the pieces are now more numerous and easier to share.

ACTUAL EXAMPLE:

Let's take an example of the NVIDIA announcement. NVIDIA did a 4-for-1 stock split. But what does that actually mean? In the simplest terms, for every single share you currently own, you’ll now have four just like the piece of cake. But before you start dreaming of instant wealth, there’s a catch the price of each share will be divided by four as well.

After the Stock Split: What Really Changes?

Here’s how things shake out after the split:

1. The New Share Price:
   • Your shares were worth $800 each before.
   • After the split, the price of each share drops to:
   • $800 / 4 = $200 per share.
2. Your New Share Count:
   • You originally had 10 shares.
   • Now, each of those shares has been multiplied by 4, giving you:
   • 10 shares x 4 = 40 shares.
3. Your Total Investment Value:
   • You now hold 40 shares, each worth $200, so your total investment is still:
   • 40 shares x $200 per share = $8,000 total value.

So, even though the number of shares you own has quadrupled and the price per share has dropped, the overall value of your NVIDIA investment hasn’t changed a bit—it’s still $8,000.

What Exactly Is a Stock Split?

When a company like NVIDIA announces a stock split, it doesn’t actually change the total value of the company. Instead, it changes the number of shares that exist and how much each share costs. The overall value of the company is its market capitalization which stays the same.

Let’s look at NVIDIA again:

1. Market Value Before the Split:
   • Say NVIDIA had 1 million shares outstanding.
   • The market capitalization (the total value of all those shares) would be:
   • 1 million shares x $800 per share = $800 million.
2. After the 4-for-1 Stock Split:
   • The number of shares increases to 4 million (1 million shares x 4).
   • But the market capitalization stays at $800 million.
3. Adjusting the Share Price:
   • The new share price is figured out by dividing the market capitalization by the new number of shares:
   • $800 million / 4 million shares = $200 per share.
4. Your New Holdings:
   • After the split, you now own 40 shares (10 shares x 4).
   • Each share is worth $200.
   • The total value of your shares remains:
   • 40 shares x $200 = $8,000.

Breaking It Down Simply

Let’s put it in even simpler terms:

• Before the Split:
  • 10 shares at $800 each = $8,000 total value.
• After the Split:
  • 40 shares at $200 each = $8,000 total value.

Why It’s More Than Just a Math Problem

Sure, it looks like a simple math equation, just dividing the price by 4. But there’s more to it. After the split, the market (that’s people like you and me, buying and selling) will determine the new price per share. The idea is to keep the value of your total investment the same, even if the numbers look different.

The Takeaway

When NVIDIA or any other company announces a stock split, here’s what happens:

• The number of shares you own increases.
• The price per share decreases.
• The total value of your investment stays exactly the same.

Understanding how a stock split works helps you see that while the numbers on your investment statement might change, your overall stake in the company and its value remain steady. It’s a move that often makes shares more accessible to more people, while keeping everything balanced for current investors.