Stock Splits Explained: Definition, Examples, Relevance

Is 2022 the year of the stock split?

Big names including Shopify (STORE) – Get the Class A report from Shopify, Inc.Amazon (AMZN) – Get the report from Amazon.com, Inc.You’re here (TSLA) – Get the Tesla Inc reportAlphabet (GOOGL) – Get the Class A report from Alphabet Inc.and GameStop (EMG) – Get GameStop Corp Class A report. announced stock splits.

In March, Amazon made headlines when it announced a 20-for-1 stock split. Since the announcement, the company’s stock price has been on an upward trajectory.

Similarly, Tesla’s stock traded higher following the announcement of a stock split in the same month.

So what are stock splits and do they still have the same relevance in the age of ETFs and fractional shares?

FULL VIDEO TRANSCRIPTION BELOW:

What is a stock split and why do companies do it?

Simply put, a stock split divides a company’s existing shares into several new shares, but keeping the same overall share price.

There are no set guidelines as to how often a stock split can occur. Traditionally, they have been used to create shareholder value, although the exact use of a split varies on a case-by-case basis.

A company’s board of directors will decide to proceed with a stock split and then notify the SEC at least 10 days before the split.

It basically works this way:

This is a company with a stock price of $50 each.

Then they decide to do a 5-for-1 stock split.

This means there will be five slices worth $10 each.

But the overall price is still $50.

In March 2022, Amazon announced a 20-to-1 stock split and the tech giant is no stranger to splits.

During the dotcom bubble, Amazon split its stock three times.

But investors have other options…

There are fractional shares which, as the term suggests, only buy a portion of a whole share.

In addition, there are of course ETFs, index funds, etc., which are basically a basket of stocks and bonds.

So why is a stock split important from a business perspective?

Some argue that stock splits can increase liquidity by making it easier to buy, sell and convert smaller shares into cash.

Also, a stock split often signals the prosperity of the business.

A stock split could allow the company to be included in major indices, which will have a direct impact on ETFs, mutual funds and other investor funds.

For example, in 2014 Apple did a 7-to-1 stock split, taking the stock price from $650 to $90, helping it secure a spot on the Dow Jones Industrial Average. .

Just because a company’s stock price is high doesn’t mean it should do a stock split.

Legendary investor Warren Buffett’s Berkshire Hathaway is the perfect example.

Despite Berkshire’s 6-figure stock price, Buffett is adamantly opposed to stock splits. Buffet believes the high price attracts investors interested in long-term growth.

However, this does not apply to Berkshire Hathaway Class B shares. In January 2010, the Class B shares were split 50 to 1.

A stock split doesn’t fundamentally change the value, but it could be an essential step in attracting more investors.

Additionally, the announcement of a stock split often creates news or grabs headlines, increasing a company’s exposure.

This abundance of options has many people wondering if stock splits still have the same impact on modern investing.

About Shirley L. Kreger

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