Some of the biggest names in tech and retail have undergone stock splits in recent memory. The most recent being Amazon having announced a 20-1 stock split the past week. Given the high value of amazon shares currently, and previously Tesla when they announced their split. The question for those that are new to stocks may be, what exactly does a stock split entail?
The basics of a stock split.
It is important to note that fundamentally after a stock split the value of a company does not change. The end goal is to increase the liquidity of the company. The most common stock splits are often 2-1 or 3-1, where the value of each share drops in proportion to the new overall quantity. So for example if stock A is worth 500$ then, after a 2-1 split if you owned 1 share pre-split, then you would have 2 shares now valued at 250$ each. For blue-chip companies, a stock split can often be a bullish-signal for traders, a stock that has historically done well is more appealing at 200$ than 2000$ for a lot of retail traders. The expanded appeal of the new stock price ideally leads to the increased liquidity the company was looking to create.
Amazon shares in this case are currently trading at 2,699$ and while I do not believe this will be the split price, each new share would be valued at approximately 135$ after the 20-1 split. Many may see Amazon at 135$ to be bullish given the previous heights the company’s share price has reached and may return to eventually. Apple during their own split, did a 4-1 split reducing their share price from 540$ to 135$ at the time.
Impact of a stock split
When Tesla did their own split recently, it was a 5-1 stock split that saw the value of shares skyrocket as buyers flocked to purchase before the split. As Tesla has approached the price per share it originally announced the stock split at, for investors who purchased a new position in the company at the time, it has worked out well for them. Now as we know, every stock does not perform the same, Apple for example is still trading around 154$ a share, far below the pre-split price of 540$. Historically we have seen Tesla to be one of the more volatile stocks with large swings in prices both up and down.
With Amazon’s upcoming split we may see a large inflow of buying interest as investors look to secure a long term position at a price that may now be more appealing. As with all investments, risk management is the key determinant in deciding whether or not to pursue it, and a sub 200$ amazon share poses less risk as a Blue-chip staple, than a 2000$ share.
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