What is a stock split
A stock split is a type of corporate action that occurs when a company's board of directors decides to divide the company's outstanding shares into a larger or smaller number of shares. Splits are a change in the number of outstanding shares of a company’s stock without a change in shareholders' ownership percentage in the company. For example, with a 2:1 split, a client will receive 2 shares for each share owned prior to and through the open on the security's split ex-dividend (or “effective”) date.
There are two types of stock splits:
Forward splits are the division of the outstanding shares of a corporation into a larger number of shares. For example, in a three-for-one stock split (3:1), each old share is now equal to three shares. The price per share would also go down. In this example, if the pre-split share was worth $9, the post-split share would be worth $3. Usually, splits must be voted by directors and approved by shareholders.
Reverse splits are a reduction in the number of outstanding shares. For example, if you had 300 shares of XYZ and there was a one-to-three reverse split (1:3), your old 300 shares would now be equal to 100 shares. The price of each new share would also be worth more. If the pre-split share was worth $2, the post-split share would be worth $6.
When you hold a short position on a stock that has a forward split, the shares will be debited from (NOT credited to) your account. Essentially, your short position is increased due to the split.
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How AMZN's 20-for-1 stock split can affect your account
Amazon (AMZN) recently announced a 20-for-1 stock split. The split takes effect on June 3 for shareholders of record on May 27. The stock split happens automatically in your account, and you are not required to do anything. TD Ameritrade does not charge a fee for this type of stock split.
If you own shares of AMZN before market open on June 3 you will own 20 shares for every one you hold, and the stock price will be reduced to one-twentieth of its value at the start of trading on June 3. For example, if you hold 100 shares of AMZN trading at $400 per share, after the split you will own 2,000 shares valued at $20 per share. Likewise, if you own one options call with a strike price of $400, after the split you would own 20 contracts controlling 2,000 shares each, at a $20 strike price.
If you sell AMZN shares after May 27 but before June 3, you will sell them at the pre-split price. You will not be entitled to the split shares. For example: If on the last day of trading AMZN, June 2, you sell 300 shares for a pre-split market price of $400 per share, you will receive $120,000. You will not receive any split shares.
If you buy shares after May 27 but before June 3, you will purchase shares at the pre-split price. Following the split, you will receive the additional shares resulting from the stock split. For example: If on May 31 you buy 100 shares (and hold them through the open on June 3) at $400 per share, you will pay $40,000. You will receive 1,900 additional shares after the stock split, and the price will be reduced to the post-split price.
How Alphabet Inc.'s 20-for-1 stock split can affect your account
Alphabet Inc. (GOOG & GOOGL) recently announced a 20-for-1 stock split. Distributions from the stock split will be made to shareholders after the close of business on July 15, and trading will begin on a split-adjusted basis on July 18. The stock split happens automatically in your account and you are not required to do anything. TD Ameritrade does not charge a fee for this type of a stock split.
If you own shares of GOOG or GOOGL on or before July 15, on July 18 you will receive 20 shares in exchange for every 1 you hold, and the stock price will be reduced to one-twentieth of its value. For example, if you hold 10 shares of GOOG or GOOGL trading at $2,200 per share, after the split you will own 200 shares valued at $110 per share. Likewise, if you own one call option with a strike price of $2,200, with a 20 for 1 split, you will own 20 call options at a $110 strike price.
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