Stock splits change nothing (and everyone reacts anyway)

A stock split cuts the pizza into more slices. There is exactly as much pizza afterwards as there was before. And yet splits are announced with fanfare, and prices frequently rise on the news. Both of those facts are worth understanding.

What happens mechanically

In a 10-for-1 split, every share you hold becomes ten shares, and the price of each is divided by ten. If you had one share worth £500, you now have ten shares worth £50. Your stake in the company has not changed by a penny. Your ownership percentage is identical.

So why does the price often rise?

No value has been created, so any move is behavioural. Three explanations, in descending order of respectability:

• Accessibility. Before fractional shares were common, a £3,000 share was simply out of reach for small investors. Splitting brought in new buyers. This effect has largely evaporated now that most brokers sell fractions.
• Signalling. Boards tend to split after a long rise, and only when they are confident. The split itself is meaningless, but it is a message that management is not expecting a collapse.
• Plain psychology. £50 feels cheaper than £500 even to people who know better. That is not a reason. It is a bias, and it is one you can be on the wrong side of.

If your reason for buying is that the share price got smaller, you have been persuaded by arithmetic that cancels out.