A stock split occurs when a company issues additional new shares to existing shareholders in proportion to shares already owned. Companies declare stock splits mainly to increase the marketability of the stock to retail investors who often find a lower-priced stock more appealing. Stock splits are often enacted after a run-up in the price of the shares.
1. Look in your investment records for the price you paid for the shares you bought. If you don’t have this information, contact the broker who executed the purchase on your behalf. For tax purposes, add the amount of the broker’s commission to find your cost basis. If the shares were a gift, you normally use the original owner’s purchase price and fees as the cost basis. If the shares are an inheritance, the share price and cost basis is normally the price of the shares on the date of the original owner’s death.
2. Multiply the original number of shares purchased by the ratio of the stock split to find the number of shares you now own. If the stock split is 2 for 1 and you had 100 shares, you now have 200. If the stock was 3 to 2 split, those 100 shares would become 150 shares.
3. Divide the total purchase price of the shares by the new number of shares. For example, assume you bought 100 shares at $40 per share for a total purchase price of $4,000. Your total purchase price does not change, but it is now split among a larger number of shares. If the stock split 2 for 1, divide $4,000 by 200 for an adjusted purchase price per share of $20. If you want to adjust the per share cost basis, the calculation is the same. Just use the cost basis instead of the purchase price.
4. You can calculate the purchase price for a reverse stock split the same way you do for a normal stock split. Occasionally a company will reduce the number of outstanding shares by issuing new shares, each of which replaces more than one old share. The math is the same. The price per share is increased in a reverse stock split instead of being reduced.
Items you will need
- Stock transaction records