How Split-Adjusted Prices Impact Stock Analysis

What is Split Adjusted?

Split adjusted refers to how historical stock prices are recalculated after a company undertakes a stock split, allowing for more accurate comparisons over time. When a stock splits, the number of shares changes, but the total value remains the same. This adjustment in historical data helps investors understand true growth over time by accounting for these changes.

We’ll give you a straightforward explanation of split adjusted stock prices, how they impact your investments, and what you need to consider when evaluating stocks with a history of splits, ensuring that you can make informed decisions based on accurate historical data.

How Stock Splits Impact Historic Prices

Stock splits reduce the price of shares by a given fraction to accommodate the creation of new shares. For example a 2-for-1 split means the price is halved while shares are doubled, a 3-for-1 split implies the price is reduced to one-third while the share count is tripled, and so forth.

Companies can split their shares for multiple reasons, but the primary reason is to keep their share price affordable to most people. The thinking is that it will have higher investment interest, wider ownership, and a stronger secondary market. All of these components contribute to make it easier and cheaper to raise additional capital with a primary market offering of additional shares.

Some companies see this action as a gimmick and refuse to split their shares. Thus Alphabet, Berkshire Hathaway, and Amazon, have very high share prices, while companies who have offered share splits, like Apple and Microsoft, have comparatively lower share prices. Regardless of how a corporations officer sees the matter, stock splits affect historical prices in ways that make it difficult for researchers to track the amount of growth an investor will experience.

Stocks can reverse-split, creating fewer shares at a higher price, again with valuation remaining the same. Reverse stock splits, also known as a stock consolidation or share rollback, create higher priced shares. There are a number of reasons why a company may decide to reduce its number of outstanding shares in the market, which, unfortunately for the company, may be the result of poor stock performance. In the vast majority of cases, a reverse split is undertaken to fulfill exchange listing requirements.

Additional Factors in Split Adjusted Stock Analysis

Investors owning stocks that undergo splits see little effects in terms of the value of their holdings overall. The number of shares in their account changes, but not the balance. One hundred shares of a stock at $50 per share has the same value as 200 shares of the same stock trading at the split price of $25 per share.

Per share data, such as earnings, revenues, sales, etc., will indeed change. However, the math says that ratios, such as the price-earnings (p/e) ratio, will remain the same. Price per share and earnings per share both split the same way.

Investors looking at charts will also notice that historical volume will change according to the split ratio, although in reverse. In other words, a stock that traded 1,000 shares on a given day in the past later undergoes a two-for-one split. Looking at a split-adjusted chart after the split occurs will show 2,000 shares at half the price for that same day. Again, the dollar value of the shares traded that day will remain the same. A slight drawback to this is that the new data may make some stocks appear to have been highly liquid for a longer period of time than they actually were.

While split adjust usually refers to stock prices, options on underlying split stocks are also split-adjusted by increasing the number of shares covered by the terms of the option. This conversion is done by the same split ratio as the underlying shares, and the strike price is divided by the split ratio. This is also the reason option quotes show fractional options strike prices, or non-standard contract sizes, following stock splits.