What Is a Stock Split?
A stock split happens when a company's board of directors divides its stock in order to increase total number of shares outstanding. When this happens, a single share reduces in market value as it now represents a smaller portion of ownership in the company.
A lower share price can seem more appealing to investors. Many investors may feel intimidated by a $2,000 share price, but a $20 share price is far more appealing. Therefore, corporations tend to be more likely to split their stock when the share price is quite high.
While a corporation's market capitalization does not change as a result of a stock split directly, in many cases the company's valuation will trend as a result of new investors buying into the lower share price.
Another key advantage of a stock split is that it can help boost liquidity since the difference between a stock’s bidding and asking prices will be smaller. The bidding price is the amount buyers offer to pay for a stock while the asking price is that which the seller is offering the stock. If a stock trades at $1,000 per share, the difference between the bidding and asking price is likely large when compared to a stock which trades at $10 a share.
Key Takeaway: In the event of a stock split, the corporation's market capitalization does not change directly, but may trend higher as new investors take positions at the lower share price.
What Happens When a Stock Splits?
In a 2-for-1 stock split, an additional share is given for every share currently owned by a stockholder. For instance, if a company has 50 million shares before the split, it will have 100 million shares following the stock split. As a result, each share loses half of its ownership value. But since the number of outstanding shares has doubled, it won’t affect the total value of an investor's position.
Key Takeaway: The reduced stock price following a stock split makes a highly desirable company's shares appear more reasonable to more people.
Motivations for doing this usually stem from a corporation’s acknowledgement that its stock has soared so high and for quite some time, which in turn can limit its access to fresh capital. In this scenario, the corporation understands the benefits of a stock split exceed the downsides of lowering the value of each share.
Why Do Stocks Split?
Stock splits make shares more affordable to more people, and companies may benefit as a result. Although the price per share drops in a stock split, and the number of shares outstanding increases, as stated earlier, the stock split has no direct impact on the market capitalization of a company.
When Do Stocks Split?
Stock splits may occur when a stock price is high and the company wants to make its shares more attractive to everyday investors, making them more easily tradable, thus increasing liquidity. A company may also decide to carry out a reverse stock split when its stock price is so low that it risks becoming delisted.
Advantages of a Stock Split
A stock split can be greatly beneficial to investors.
Some studies suggest that stocks which have split tend to outperform the broader market in the immediate years following a split.
When each share price is lower, it becomes easier to sell shares once an investor decides to buy new ones on the market.
Each trade involves a smaller percentage of an investor’s overall portfolio, which can offer more flexibility.
Amazon Stock Split: May 2022
Amazon (AMZN) announced on March 9, 2022, its first stock split since the dot-com bubble of 1999. The AMZN stock split date is May 25, 2022. The board of directors approved a 20-1 split, which means that shareholders will own 20 shares for every one share owned prior to the split.
The board also authorized a stock buyback of up to $10 billion of shares. Companies buy back shares for various reasons, including consolidation of ownership and to increase the value of shares.
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