Though they’re much rarer than they used to be, stock splits garner attention on Wall Street. For a good reason, stock splits tend to make headlines in the financial industry.
A stock split is when a company increases or decreases the number of shares outstanding. It is often a mechanism used to boost the stock’s liquidity.
They are a major event for investors to look forward to, even if the value of the stock doesn’t change. Wait, what was that last part? The value of the stock doesn’t change? But surely, when there are more shares, the value does change. It does, and it doesn’t. Let’s think of a company as a pizza cut into ten slices.
If the company has a 2-for-1 stock split, we’d now have twenty slices. But the size of the pizza itself hasn’t changed.
You may own twice as many shares as before, but you’re generally not wealthier.
What stock splits generally do is play with the psychology of investors. Let’s be honest. Most investors are greedy by nature. We’re investing money to make more money, hopefully. So many investors think of more shares as better.
We usually see a bullish spike in the stock’s price as buying pressure sets in before the split occurs. But don’t be fooled: the size of the pizza remains the same.
Is a Stock Split Good?
It’s a question that investors have been asking for decades now: is a stock split good? It depends! Splits can be good for the company. A lower stock price usually allows more investors to buy shares.
They have other positive effects as well. For example, for indices that use price-weighted inclusion, like the Dow Jones, a stock split is a way for a company to be added. Apple is a notable company that did this when it executed a seven-for-one stock split in 2014 and was subsequently added to the Dow Jones in 2015.
Increased liquidity in the stock is good as well. For the most part, companies that execute splits are in good shape. Shares have performed well enough to be at a reasonably high valuation, and the company can afford to see its stock price slashed.
You might naturally think that stock splits dilute the value of the shares. However, if a split makes it cheaper for investors to buy the stock, it also makes it cheaper for the company to buy back its shares.
For retail investor sentiment, a stock split is generally a net positive. First, allowing more investors to buy the stock is a good thing. Companies like to reward their shareholders; providing them with more stock is one way they can do it.
Can a Stock Split Be Bad?
Absolutely. Occasionally you will see a company implement a reverse stock split.
This means that each slice of the pizza is made larger. So think of our ten-slice pizza as now being a five-slice pizza. While that’s not necessarily bad when it comes to pizza, when it comes to a stock, it can be concerning.
Distressed companies who want a higher stock price often use reverse splits.
We see reverse stock splits when a company needs to meet certain price requirements. For example, to avoid being delisted from the NASDAQ index, a stock must trade above $1 per share, the minimum bid price.
It can get delisted if the stock does not trade over that $1 price level for a certain time. To avoid this, companies will implement a reverse split to move the stock price back over $1 artificially.
Other companies see a higher stock price as being elite. Therefore, they believe the company will improve if the stock price trades. If these companies are concerned with these things, they might not be great businesses to buy in the first place.
2022: The Year of the Split
We’re only four months into the year, and several high-profile stock splits have already been announced. With the rise in retail investors entering the stock market, companies are becoming more sympathetic. So let’s look at the top splits announced for 2022!
Alphabet (NASDAQ: GOOGL)
The first major company to announce a split this year was Alphabet. It is the parent company of Google, YouTube, and the Android smartphone. By market cap, it is the fourth biggest company in the world and the third largest in the US.
It is also one of six companies globally with a current market cap of over $1 trillion. So this year’s split will be the first real one in the company’s history.
With shares currently trading at around $2,500 per share, it is easy to see why the company wanted to make the stock more accessible. This year, As a result, Alphabet’s split will be a 20-for-one split in July.
Amazon (NASDAQ: AMZN)
Shortly after Alphabet announced its split, fellow tech giant Amazon joined the fun.
The announcement was somewhat of a shock as Amazon has avoided splitting its expensive stock for years.
Many believed that former CEO Jeff Bezos did not want to split the stock, but the new CEO Andy Jassy had a different idea.
Amazon split its stock thrice during the dot-com bubble years in 1998 and 1999.
This year’s stock split for Amazon will also be a 20-for-one split and will take place in June. Some believe Amazon and Alphabet are splitting their stock to be included in the Dow Jones Industrial Average.
Tesla (NASDAQ: TSLA)
Less than two years after the company’s first-ever stock split, Tesla announced another one is coming this year. In August 2020, Tesla split its red-hot stock 5 for 1.
This year’s split still needs to pass a vote later this year, but chances are this vote will pass. Unfortunately, no other details have been released, so nobody knows the ratio or date it will take place.
Most believe it will be a 4 for 1 or 5 for one stock split, given its current price of just above $1,000 per share.
GameStop (NYSE: GME)
The lead meme stock also turned heads earlier this year when it announced its stock split. But, of course, few things excite retail traders more than a split, so GameStop is certainly playing to its crowd.
GameStop’s stock split is going to be slightly different. It’ll be in the form of a dividend. Most other details have yet to be released as a vote needs to pass at the annual shareholder meeting.
The proposed split would increase the number of shares from 300 million to 1 billion. However, with shares trading at just over $140, the split likely won’t be a significant ratio.
Shopify (NYSE: SHOP)
The most recent company to announce a split is Shopify. The Canadian eCommerce giant was one of the hottest stocks over the past few years. So far in 2022, shares of Shopify are down more than 64% as the tech correction has hit the company hard.
Shopify announced its split would be a 10-for-one split and take place at the end of June. This will be the first official stock split in Shopify’s history.
Should I Buy Before or After the Stock Splits?
It’s a great question and one that I see frequently being asked. Understandably the natural inclination is to buy the stock ahead of its split. But with so many people thinking the same way, you’ll likely be buying the stock at its high.
A stock split isn’t a business event, so it can artificially raise the valuation price. The translation of this is that there is a good chance the stock price will fall post-split.
But for some reason, investors think holding a stock through the split is better than buying the shares post-split. So, for example, buying one share of Alphabet will now receive twenty in July.
But nobody wants to buy twenty shares in July. They want to see their single share split. There isn’t a tried and true time to buy a stock that will split. Some will say buy it before to gain the value of the surge into the split.
While some will say buy the stock post-split when the price has leveled off. This is something that is totally up to the individual investor. As I said before, it doesn’t matter when you buy the pizza. It just matters that you own it.
