Understanding the Impact of a Stock Split

When Netflix announced its 7-for-1 stock split, you might have seen the headline and wondered, “Wait, did everyone who owns the stock just get seven times richer?” It’s a fair question, but the answer is a lot less magical—and much more interesting.

Think of it like exchanging a $20 bill for two $10 bills. You have more pieces of paper in your wallet, but the total value remains exactly the same. A company’s pie doesn’t get bigger; the slices just get smaller. A stock split is more about psychology and accessibility than a sudden windfall.

What Is a Stock Split? The Pizza Analogy

Imagine you have one large, single-slice pizza. A forward stock split is like a chef neatly cutting that big slice into seven smaller, more manageable pieces. You still have the exact same amount of pizza, just in a different form. That is how a stock split works. It takes each existing share of a company’s stock and divides it into multiple new shares.

This is precisely what happened with Netflix’s 7-for-1 split. For every single share an investor owned, the company replaced it with seven new shares. If you had one share of “Netflix pizza” before the split, you suddenly had seven smaller ones afterward. The number of shares changes, but your total ownership stake does not.

Crucially, a split doesn’t magically create money. The price of each individual share simply goes down to reflect that there are now more of them. So, does this maneuver actually change the company’s total worth?

Does a Stock Split Change a Company’s Value?

A company’s total value on the stock market, known as its market capitalization (or “market cap”), is calculated with a simple formula: Share Price × Total Number of Shares.

Let’s use a simplified example. Before its split, imagine Netflix had 1 million shares trading at $700 each. Its market cap would have been:

$700 per share × 1 million shares = $700 million total value

After the 7-for-1 split, that same company now has 7 million shares. Because the total value of the “pizza” hasn’t changed, the price of each new share drops to around $100. The math confirms the outcome:

$100 per share × 7 million shares = $700 million total value

The total value stays exactly the same. The split simply repackaged the company’s worth into smaller, more numerous pieces. If the split doesn’t make the company any richer, why would Netflix bother doing it?

If Value Stays the Same, Why Do Companies Split Their Stock?

The answer has less to do with math and more with human psychology. Even though the company’s total value doesn’t change, a sky-high share price can feel intimidating and out of reach for many everyday investors.

Think about it in a retail store. A single big-ticket item priced at $700 might make you pause, whereas an item priced at $100 feels far more manageable. Even if you have the $700, psychologically, a smaller price tag lowers the barrier to entry. Companies use stock splits to create this exact effect.

By turning one $700 share into seven $100 shares, Netflix made owning a piece of the company feel more accessible. This lower price point opens the door for a new wave of investors who might have been hesitant to buy a single, expensive share. It simply makes the stock easier to purchase for people who don’t have thousands of dollars to invest at once.

Ultimately, the goal isn’t to magically increase the company’s worth, but to broaden its base of shareholders. While the business fundamentals of Netflix didn’t change, the opportunity for more people to participate did.

What a Stock Split Means for a Regular Shareholder

So, what did this actually look like for someone who already owned Netflix stock? The good news is, nothing scary. The entire process is automatic. One day they owned a certain number of shares at a high price, and the next, they simply owned more shares at a proportionally lower price. No action was required from them.

The math is straightforward. If you owned 10 shares of Netflix before its 7-for-1 split, here’s how your account would have changed overnight:

• Before: 10 shares at ~$700/share = $7,000 total value

• After: 70 shares at ~$100/share = $7,000 total value

Crucially, your total investment value and your ownership stake in the company didn’t change at all. You still owned the exact same slice of the Netflix pie—it was just cut into more pieces.

Should I Buy a Stock Before or After It Splits?

This is a big question for many people, and the answer is surprisingly simple: the split itself shouldn’t be your deciding factor. Since a standard forward stock split—like the one Netflix did—doesn’t change the company’s actual value, it doesn’t make the stock a fundamentally better or worse investment.

Your focus should always be on the business behind the stock. Is the company healthy and growing? Do you believe in its future? Those are the questions that truly matter, not the cosmetic price tag of a single share.

However, splits do have an opposite: the reverse stock split. This is when a company combines shares to make a very low stock price look higher. For example, they might turn 10 shares worth $1 each into one share worth $10. While a forward split is often a sign of confidence, a reverse split can be a red flag that a company is struggling. Understanding the stock split vs. reverse stock split difference is key.

The Real Impact: You’re Now an Informed Observer

You once might have seen a headline about a “stock split” and felt like you were on the outside of a complicated financial secret. Now, you can see it for what it is: a simple shift in numbers, not a magic trick to create wealth.

Remember the pizza. A 7-for-1 split doesn’t make the company pie any bigger; it just cuts it into more slices. The total value of what you own stays exactly the same.

So, the next time you hear that a major company is splitting its stock, you won’t have to wonder. You’ll know it’s about making shares feel more accessible, not changing the company’s fundamental worth. That’s a powerful piece of financial literacy you now have for good.

• A stock split doesn’t create value: Your ownership percentage and the company’s market value don’t change just because the share count changes.

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  Don’t buy “because it’s cheaper”: A lower post-split share price can feel more affordable, but valuation (earnings, growth, debt, competition) is what matters.

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  Watch for short-term volatility: Splits can increase trading activity and price swings around the announcement/effective dates.

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  Confirm the exact split details: Verify the split ratio, record date, and effective date using Netflix investor relations or SEC filings—don’t rely on social posts.

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  Understand brokerage handling: Ask how your broker treats fractional shares, pending orders, options contracts, and dividend reinvestment (if applicable).

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  Tax and cost-basis tracking: Splits usually aren’t taxable events, but ensure your cost basis per share updates correctly in your account.

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  Distinguish from reverse splits: A reverse split can signal distress; don’t assume all splits are positive.

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  Not financial advice: Consider your risk tolerance and time horizon, and consult a licensed financial professional if you need personalized guidance.