A common question that often stumps investors is how do I determine the cost basis of my stock after a stock split? The calculation is fairly easy and straight forward, but since it does involve performing some math, many investors run to the hills out of fear.
Whether a company you own stock in is doing very well or struggling, a common occurrence over the lifetime of owning a stock is dealing with a stock split.
So how does the stock split affect the value of your investment?
To put it simply, the stock split doesn’t change the value of your investment at all or even your percentage of ownership in the company.
What does change is the number of shares you hold will now be doubled since the stock price will be halved. For example, if you assume a pre-split price of $40 per share and you hold 100 shares, after the split you will hold 200 shares at $20 per share. In both cases, the value of your account remians the same – $4,000.
Another issue is determining how the stock split affects the cost basis of your shares.
For income tax purposes, the cost basis of each additional share you receive as a result of the split and each share you currently own will be equal to one-half the cost basis of the shares just prior to the split. An example to help demonstrate this is: if you hold 100 shares of company ABC with a pre-split cost basis of $30 per share, after the split you will now hold 200 shares with a cost basis of only $15 per share. Once again, same total value just a different cost per share of ABC’s stock.
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