First, what is a stock split you might ask?
Stock splits are a type of corporate action where the company’s executives increase the number of shares, giving existing shareholders more stocks proportionate to the split ratio. The price per stock also decreases proportionate to the split ratio.
Stock splitting does not change the company value and the splitting of the stock can affect market demand, which affects price per stock after the initial decrease of price per share.
What happens to the investor shares
You’re probably wondering what happens to my shares when a stock splits?
When a stock split occurs, the effect on investors is multifaceted. When a company decides to split their stocks, this move affects the price of each share. The price of each share immediately goes down, which makes sense considering there’s now more shares representing the same amount of company assets. In a 2-for-1 stock split, share prices are cut in half. In a 3-for-1 stock split, those prices are cut by a third. Ultimately, shareholders maintain the same equity, split up in a different way.
Here's the formula to calculate the new stock price
Current stock price / Split ratio = New share price
So then the main question of this post, why would company's choose to do a stock split?
There are various things that can lead to having a split, but one major factor is, they are trying to create new bull momentum for the stock.
Historically stock splits are a bullish signal to the stock, since the 1980's Bank of America Global Research concluded that stock that announce plans to do a stock split preform almost 3x better than the S&P 500 in 1 year. How could they be preforming better then?
After the split, you’ll most often see the share price rise. This is a natural effect of market demand. When investors hop in on the bandwagon and invest in the lower priced stock, they lift the demand for it and increase the prices.
Which companies have plans doing stock splits this year
Multiple companies have announced plans to do (or vote on) a stock split this year, the list includes;
Tech titians Amazon, Alphabet, and Shopify
EV maker Tesla
Video game companies Gamestop and Nintendo
Home improvement outlet Restoration Hardware
Takeaway
There are various ways companies would go for a stock split, a cheaper price to the stock may make the share more appealing to investors and create a new bullish move in the stock.
This is for educational purposes only and is not investment advice or an investment recommendation. Do your own research to understand the risks you may be taking on before investing. I own positions in some of the names that have been listed in this post.
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