When am I entitled to participate in a stock split? — record date, split date, ex date

Question

Stock split announcements usually mention a few dates — record date ("date of record"), split date ("distribution date", "pay date", or "payment date"), ex date ("ex-split date"). Examples:

• Apple's stock split:

  Each Apple shareholder of record at the close of business on August 24, 2020 will receive three additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on August 31, 2020.

• Tesla's stock split:

  Each stockholder of record on August 21, 2020 will receive a dividend of four additional shares of common stock for each then-held share, to be distributed after close of trading on August 28, 2020. Trading will begin on a stock split-adjusted basis on August 31, 2020.

In the case of the Tesla split, the record date is August 21, the split date is August 28 (Friday), and the ex date is August 31 (Monday).

Apple's Investor Relations FAQ provides definitions of these dates:

What is the effective date of the split?

There are several key dates.

The Record Date – August 24, 2020 - determines which shareholders are entitled to receive additional shares due to the split.

The Split Date – August 28, 2020 - shareholders are due split shares after the close of business on this date.

The Ex Date – August 31, 2020 - the date determined by Nasdaq when Apple common shares will trade at the new split-adjusted price.

However, further down in the FAQ, there is an explanation that seems to contradict the definition of the record date given above:

What happens if I buy or sell shares on or after the Record Date and before the Ex Date?

[...]

If you buy shares on or after the Record Date but before the Ex Date, you will purchase the shares at the pre-split price and will receive (or your brokerage account will be credited with) the shares purchased. Following the split, you will receive (or your brokerage account will be credited with) the additional shares resulting from the stock split.

Judging by the Apple FAQ, the way the record date works for stock splits is completely different from the way the record date works for cash dividends. With cash dividends, people who become shareholders of record after the record date are not entitled to the dividends. With stock splits, however, people who purchase shares after the record date (but before the ex date) are entitled to the stock split. Furthermore, for stock splits, the record date comes before the ex date, whereas for cash dividends, the record date comes after the ex date.

It appears that I am not the only one confused about this. A quick internet search reveals years and years of confusion regarding the record date for stock splits. An extremely common point of confusion is the apparently incorrect assumption that the record date for stock splits works in the same way as the record date for cash dividends.

A few questions:

• Am I right that the record date for stock splits works differently from the record date of cash dividends?
• The only relevant dates for a stock split seem to be the split date (on which I will receive new shares after the market closes), and the ex date (on which I can sell the new shares on stock exchanges at a post-split price). It seems that the record date is completely irrelevant. What is the record date for?
• From my understanding, the price of the stock will be reduced at the instant the new shares are distributed (on the split date). Is this correct?

Answer 1

TL;DR The record date determines who Apple/Tesla distribute the shares to, while the effective date determines who ultimately receives those shares.

In practice, my interpretation of this is that Apple will determine on on August 24 that Alice owns a share of stock, and they will give 3 shares of stock to Alice on August 31. But if Alice sells her share to Bob after August 24, her brokerage will forward those shares on to Bob's brokerage. (And if Bob sold his share to Carol before August 31, then his brokerage would forward them Carol's.) Ultimately, whoever owns the share at the close of business on Aug 30 is who gets to keep the shares.

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Apparently, the record date isn't particularly meaningful to you, the stockholder. It is, however, apparently important for the company. There's an article on The Motley Fool that discusses Apple's last stock split, in 2014. The relevant dates for that split were

• Announcement: April 23, 2014. Apple declared they would be splitting their stock
• Record date: June, 2, 2014
• Effective date: June 9, 2014

(What follows comes from the section "Forward split case study: Apple's 2014 stock split.)

As a stock holder, for every share of Apple stock you owned at the close of business on June 8, 2014, you would wake up on the morning of June 9th and see an additional 6 shares of stock in your portfolio. The distinction is, where exactly did those additional shares come from?

If you owned prior to the record date, they came from Apple itself.

Let's say that Apple had traded for $700 per share at the market's close on June 8, the day before the split went into effect. For investors who already owned Apple stock and who held through at least June 9, the process was pretty straightforward. For every share of Apple they had in their brokerage account on June 8, which was worth $700, six more shares of Apple appeared in their brokerage account before trading began on June 9. Each of the seven shares was worth $100 immediately after the split went into effect.

If you bought after the record date, those shares technically came from whoever owned the shares on the record date. They receive the shares from Apple, but those shares are immediately transferred to you.

Here's where the corporate accounting concept of a record date comes in. Let's say that someone bought a share of Apple on June 4, 2014 -- after the record date but prior to the effective date. In this case, the new shares would technically be given to that share's prior owner. However, because they sold their share prior to the split's effective date, those new shares would be transferred (by the brokerage) to the investor who bought the shares.

Answer 2

Here, I elaborate on chepner's excellent answer.

Pre-split and post-split prices

Suppose a company's shares are trading at $100. This is the pre-split price. Suppose the company undergoes a five-for-one (5:1) stock split. Assuming that there are no fluctuations in the stock price, the stock price after the split will be $20 (100 / 5 = 20). This is the post-split price (or split-adjusted price). Shares begin trading on the stock exchange at the post-split price starting on the ex-date.

Record date and distribution date

Suppose Alice is a shareholder of record on the record date. If she doesn't sell her shares before the distribution date, she will receive new shares on the distribution date (before the market opens, or after the market closes, depending on the company), and those new shares will be hers.

Here's a twist: suppose Alice sold her shares to Bob at the pre-split price before the distribution date. What happens in this case? On the distribution date, the company will still deliver the shares to Alice's account because she was a shareholder of record on the record date. However, her stock broker will immediately take those delivered shares away and give them to Bob.

How does this work? The shares Alice sold at the pre-split price have a "due bill" attached. This due bill transfers her right to the split shares to the buyer of her shares (i.e. Bob). This due bill means that Alice will forfeit the shares received in the split. Behind the scenes, her stock broker keeps track of these due bills. On the distribution date, her stock broker will fulfill the due bill by delivering the split shares to Bob's stock broker.

In some cases, before the distribution date, there could be two markets for the stock: one that trades at a pre-split price, and another that trades at a post-split price (i.e. "when-issued" trading). If there is demand, the NYSE and Nasdaq may start a "when-issued" market for the shares. On the NYSE, "when-issued" tickers have a suffix of "WI". On Nasdaq, "when-issued" tickers have a fifth-letter suffix of "V".

Ex-split date

The ex-split date is the first day on which the shares will trade on the stock exchange at a post-split price. Before the ex-split date, the trades on the stock exchange take place at a pre-split price.

Conclusion

• The record date for stock splits is not relevant to the investor. It is only relevant for those involved in behind-the-scenes record-keeping (e.g. the company, stock brokers).
• If you buy shares at a pre-split price, you will receive the split shares on the distribution date.

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Sources

• Union Pacific Stock Split Frequently Asked Questions
• Eastman Stock Split Frequently Asked Questions
• https://invest-faq.com/stock-split/

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Related reading:

• Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends

Answer 3

Apple is splitting 4 to 1.

If I pay $450 or so per share, I get one share pre-split, 4 post.

If I pay about $112, I’m buying a single post-split share.

There’s no selling my share for $450 but still getting the 3 new split shares.

Answer 4

It's simple. You as a retail investor care only about the ex-date in the case of stock splits. The record date is important for trade settlements between brokerages but has zero impact on retail investors.