The year 2020 saw a mini boom in splits for the first time. After Apple and Tesla started the party in the summer of 2020, the trend shifted. Apple announced a 4-for-1 split in July, and Tesla followed suit the following month with a 5-for-1 split. The next year, in May 2021, NVIDIA climbed aboard the split train, and now Amazon has joined the club.
What is a Stock Split?
A stock split occurs when a firm increases the number of outstanding shares in order to increase the liquidity of its stock. Although the number of outstanding shares rises, the company's total market capitalization remains unchanged because the price of each share splits as well. In essence during a 5-for-1 split, an investor who previously held 1 share, will now possess 5 shares instead: each for 1/5th the original price.
An Attractive Action
A stock split may be viewed by some as a company wanting a bigger future runway for growth; for this reason, a stock split generally indicates executive-level confidence in the prospect of a company. Firms contemplate launching a stock spit when the stock's price is excessively high, making a regular board lot of 100 shares costly for investors. Blue chip stocks become more accessible as a result of a stock split. Furthermore, a higher number of outstanding shares might increase the stock's liquidity.
According to a recent study, since 1980, the shares of firms who undertake stock splits have typically increased by 25% a year after the split, compared to 9% for the broader market. As indicated in the chart below, they also outperform over a 6-month period.
The AMZN Masterstroke
Instead of following the other tech giants with a split of 4-for-1 or 5- for-1, Amazon’s board approved a whopping 20-for-1 stock split announced in March 2022. The stock closed at $2,387 on June 3rd, 2022, started trading at around $120 on June 6th, 2022. Markets like splits as they give investors more flexibility, while bearing no impact on a company’s fundamentals or valuation.
Another possible boost to the stock is that the stock split makes the company a candidate for inclusion in the Dow Jones Industrial Average (DJIA), as the DJIA weights components by price.
