A stock split is a corporate
action that occurs when a company changes the amount of shares it has
outstanding and then adjusts each share's price accordingly. The number of
shares received as a result of a stock split is a ratio of the total shares you
own right after the split. Stock splits are usually non-taxable. It is
important to note that after a stock split the number of shares you own in the
security and the cost basis of those shares will change. Often stock splits are
expressed as a fraction. A two for one stock split is the most common -
the investor receives one additional share for every share owned in the
security.
Example of a stock split: Nancy buys 20 shares of ABC
Corporation on April 1 for $200 ($10 per share). On June 1, ABC announces that
it's splitting its stock two for one as of July 1. As of July 1, Nancy will own
40 shares of ABC stock rather than 20 shares. Assuming that the stock is still
trading on the market for $10 per share as of June 30, on July 1 each
share will be trading for $5 per share. Therefore, Nancy still owns $200 worth
of ABC stock (40 shares x $5 per share = $200) even though she now owns 40
shares rather than 20 shares.
GainsKeeper monitors all mandatory corporate actions to U.S. equities, and
automatically adjusts each of your investments accordingly. In many cases a
corporate action, such as a stock split, will result in a new position or a
change to the cost basis of a security.
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