Nvidia Corp. shares drop 1% in premarket trading. Nvidia is preparing to start trading on a split-adjusted basis on Monday, June 10.
Nvidia Corp. shares have certainly seen momentum in the weeks since the company’s stock-split announcement, rising 27% since the chip maker said on May 22 that it intended to conduct a 10-for-1 split.
But while investors can derive some real benefits from a stock being split, the biggest reason prices tend to rise in anticipation is the psychological benefit expected from a lower stock price.
“I think it’s a muscle-memory thing, a function of investors buying because it worked in the past,” said Art Hogan, chief market strategist at B. Riley Wealth. “Everyone knows it’s not fundamental, it’s not technical, but that’s OK.”
Nvidia’s recent stock momentum likely reflects a number of factors, including the company’s upbeat earnings and a continued rotation into chip names and out of software shares. Additionally, recent results from elsewhere in the tech sector have shown that while other companies might be generating revenue from artificial intelligence, Nvidia is fairly unique in its ability to realize big profits from it as well.
Nvidia’s stock will start trading on a split-adjusted basis before Monday’s open.
In the past, investors weren’t able to buy partial shares, so if a stock traded at $1,200, like Nvidia’s does now, investors couldn’t invest only $1,000 in the company. But now, buying partial shares is not an issue, so a split wouldn’t technically make a stock any more accessible.
That hasn’t stopped companies from citing accessibility when announcing stock-split plans.
Walmart Inc.’s stock split earlier this year was part of the retailer’s “ongoing review of optimal trading and spread levels and its desire for its associates to feel that purchasing shares is easily within reach,” the company said in a release.
Founder Sam Walton “believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates,” Chief Executive Doug McMillon added. Walmart shares rose 6% between when the split was announced and enacted.
And when Apple Inc. last split its stock in 2020, the company said the lower price would “make the stock more accessible to a broader base of investors.” Apple shares climbed almost 30% from that point to when the split actually took effect.
Another psychological benefit, as Hogan explained, is that people tend to feel better about being able to buy more shares. If they invest $1,000, they’d rather get 10 shares in return than just one.
Hogan said there are also some real benefits to having a lower stock price.
For one, lower prices make option trading more accessible. Since options are priced for blocks of shares — the standard individual stock option contract is for a block of 100 shares — “it’s a whole lot easier to play options in a $100 stock than a $1,000 stock,” Hogan said.
An increased access to options provides more investment opportunities and liquidity, as well as more volatility. Basically, investors have more chances to make money.
Hogan said another real reason for a company to split a stock — especially a company as big and important as Nvidia — is that it provides “an easier pathway” to get into the venerable Dow Jones Industrial Average DJIA. And becoming a member of the nearly 130-year-old index can help provide a sense of legitimacy that could make a company’s stock more attractive to a wider range of investors.
Unlike other market trackers like the S&P 500 SPX or the Nasdaq Composite COMP, which are market-capitalization-based indexes, the Dow is price-weighted, meaning stocks with higher prices have more influence than those with lower prices.
Currently, the prices of Dow components range from Intel Corp.’s $30.42 to UnitedHealth Group Inc.’s $501.92. At Nvidia’s current price near $1,200, it would have too much influence for the keepers of the Dow to include the stock.
Apple’s stock was trading above $600 when a 7-for-1 split was enacted in 2014, and the iPhone giant’s stock was added to the Dow nine months later. And Amazon.com Inc.’s 20-for-1 stock split was enacted in June 2022, when the stock was trading close to $2,500. The stock was added to the Dow in February 2024.
But while those are good reasons to split a stock, they’re not really why investors care.
“The biggest reason is psychological. It always has been,” Hogan said. “I don’t know when the fever breaks, but it hasn’t in the 30 years I’ve been in the business.”
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