About GameStop’s 4-for-1 Stock Split

GameStop (GME) shareholders voted to approve a 4-for-1 stock split on July 7, 2022, at the company’s annual meeting. The split is scheduled for close of market on July 21. This is the company’s first stock split since March 2007.

At a theoretical share price of ~$140 (the approximate share price of $GME as of July 15), the new share price following the 4-for-1 split would be approximately $35 per share.

Stock splits issue additional shares to shareholders. With more shares issued, the price per share will reflect a lower amount. Importantly, while stock splits reduce the price per share, they do not intrinsically impact the stock’s value.

What does this mean for GameStop shareholders?

The split will impact GME shareholders of record as of July 18, 2022.

If you own 1 share of GME stock, following the 4-to-1 stock split you gain an additional 3 shares at a new share price that is lower than the previous price per share. As an investor, following the split, you’d own 4 total shares versus 1, with the total value of your shares remaining unchanged.

For example: Say you own 1 share of Company X at a current price per share of $1,000. Following a 4-to-1 stock split, you would own 4 shares of Company X at a price per share of $250. The total value reflects the same amount you started with, but you now own more total shares.

If you own a fraction of a share, the same math applies. For example, if you own 0.5 of one share of stock in this example ($500 worth), following a 4-for-1 split, you’d own 2 total shares with the same total value of $500.

Please note that you may notice temporary inconsistencies in your portfolio charts after the split is completed after market close on July 21.

What is a ‘stock dividend?’

Per GameStop’s announcement, the company declared a “four-for-one split of the Company’s Class A common stock in the form of a stock dividend.” The term “dividend” might seem confusing in this context, since dividends are commonly associated with quarterly cash distributions given to shareholders based on profits.

Stock dividends are distributions of shares of stock. GameStop will be issuing the additional shares of stock to shareholders of record in the form of stock dividends, in order to multiply investors’ positions by 4X. A stock dividend does not include a cash payout to shareholders.

How do stock splits impact cost basis?

Cost basis is the original price paid per share of stock. Investors will look at cost basis to understand tax obligations in the event that they sell the stock for a gain or less. Many long-term investors will add to positions over time, and so the cost basis of shares sold can impact total profits and therefore taxes owed.

Stock splits do not change the total basis for shares held. For example, say you purchased 10 shares of Company X for $1,000. Company X later completed a 4-for-1 stock split, which allocated you 30 more shares. The original cost basis was $100 per share, with a total cost of $1,000. After the split, your adjusted cost basis for 40 shares becomes $25 per share (40 x $25 = $1,000), with the total cost remaining as $1,000.

Bottom line: After a split, you maintain the same percent ownership, with the underlying economic value remaining the same as before the split.

Why do companies split their stock?

Stock splits are designed to make the cost per share for investors more accessible by increasing the number of shares and lowering the price per share. Stock splits had a greater impact on retail investor affordability prior to the advent of fractional shares because they made the price per one share of stock for expensive stocks more accessible for the average investor.

You can learn more about stock splits here.

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