If you’re an investor in Palo Alto Networks who woke up this morning only to have your jaw drop when you saw the stock price (Nasdaq: PANW), don’t worry. The stock hasn’t actually dropped by nearly 50%. Instead, it just split. Here’s what you need to know.
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In November, Palo Alto Networks announced that it would split its stock 2-for-1 after the close of the bell on Friday, December 13. The stock would begin trading at its new split-adjusted price on Monday, December 16. If you didn’t know this, you could be forgiven for thinking something had gone horribly wrong at the cybersecurity giant.
On Friday, PANW stock closed at $393.12 per share (down about 1.7 % for the day). But after the closing bell, the company’s stock price then split, bringing its share price down to $196.56, which is what PANW shares began trading at post-split.
So despite the large numerical difference in Palo Alto’s stock price between Friday and today, the company’s shares are actually relatively stable. As of the time of this writing, PANW shares are currently up about half a percent over their presplit close on Friday to $197.60 per share.
A stock split is an event that happens when a company decides it wants to artificially lower the price of its shares. A company can do this by splitting its stock. When a stock is split, there are then more shares in the company than what existed previously. Because there are more shares, the value of each share is lower, resulting in a lower stock price per share.
Stock splits can be done in any ratio. Palo Alto Networks decided to do a 2-for-1 stock split, which is one of the most common. That means for every one share of PANW that existed at the close of the bell on Friday, two shares of PANW exist today. Yet because there are double the number of shares, each share is worth half as much as it was before the split.
Neither. Besides normal fluctuations after the market closes or before the market opens, the value of a company is usually relatively the same pre- and post-split. This is because the value of a company, known as its market cap, is determined by adding up the total value of its shares.
For example, if on Monday, Company XYZ has a total of 50 shares worth $10 each, it would have a market cap, or total valuation, of $500. However, if Company XYZ then immediately does a 2-for-1 stock split, there would now be 100 shares in the company, but each share would now only be worth $5. But still, when you add up the value of all the existing shares, it will be the same as before—$500.
Though there are more shares, their total value is the same.
As mentioned above, they do it to artificially lower the price of their stock without actually impacting the company’s value. A lower stock price can make shares in a company more attractive to retail investors, also known as mom-and-pop investors. A lower stock price makes it easier for people with limited funds to buy into the company, which in turn may actually serve to make the stock more attractive and, ultimately, more valuable.
Sometimes companies also split their stock to make the shares more accessible to their own employees, as was the case when Walmart (NYSE: WMT) split its stock earlier this year. Other high-profile companies that split their stocks this year include burrito chain Chipotle Mexican Grill (NYSE: CMG) and AI chip giant Nvidia (Nasdaq: NVDA).
For its part, Palo Alto Networks did not give an explicit reason why it was splitting its shares.
This post originally appeared at fastcompany.com
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