Do you still remember the “Roaring 90s”, the great time of technology stocks on the American NASDAQ? Prices climbed so briskly that companies started doing quarterly stock splits.
Any speculation of an upcoming split caused euphoria among investors in advance. The rule of thumb still seems to apply today that splits are bullish. But what is it all about?
No Stock Splits For 23 Years – 20:1 at Amazon Was Overdue
For small investors, these price levels are often prohibitive, or an investment ties up a large chunk of money right away that one might have preferred to spread over several stocks. On Monday, thanks to the 20:1 split, a price of $2500 became a much more affordable $125. But how does this work?
The Number Of Shares is Increased – In Proportion The Price Decreases
As of Monday, Amazon’s stock is worth no less or more than it would have been without a split. The company’s value is now simply spread over 20 times as many shares. If the number of shares increases by 20 times, as in this extreme case, then the price drops by 1/20 in return.
The bottom line is the same, but the visual price is lower. You can now buy 8 shares with $1000 of investment capital. Last Friday you could not have bought any, because you would have lacked $1500 to get only one share.
Alphabet (Google) Also Plans a 20:1 Stock Split This Summer
With Alphabet (GOOG), the next candidate of the big technology stocks is already ready to carry out a stock split. In the summer, the number of shares there is also expected to increase twentyfold, and the price will fall in return.
Even Tesla (TSLA) is considering a split at the end of the year. The reasons are understandable. In these more difficult stock market times, companies want to lower the investment hurdles for small investors. So split stocks are more attractive, but also better?
Stocks Outperform The Market After Stock Splits?
According to a 2020 study by Schaeffer, stocks climbed an average of 5.3% in the 6 months after the split, while the index gained only 4.4%.
Scientifically, that may be a solid statistic, but in everyday investing, don’t take it as a basis for investing. These are only average values and the difference to the market is not that huge.
The basis for a buy or sell decision should always be sought in the company itself and not in the visual price. However, as an investor, you will benefit from being able to better spread your risk across these split shares in the future.