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A guide to stock splits

How they work and why more companies could decide to divide their shares

March 15, 2022, 11:27 AM PDT
By Alex Harring

approve. It would be the first time the internet giant has split its stock in more than two decades. But it would be just the latest in a line of tech companies with eye-popping share prices to divide their shares. Apple and Tesla both split in 2020. Alphabet, Google’s parent company, announced its intention to split 20-to-1 last month.

Companies split their stocks for several reasons, from making their shares more appealing to certain investors, to improving liquidity, to creating more flexibility in compensating employees. But one thing holds true across the board: The split increases the number of shares outstanding, but the company’s market value does not change.

What is a stock split?

A stock split takes place when a company increases the number of shares issued to current shareholders, thereby decreasing the value of individual shares. Based on Amazon’s current stock price of about 2900, if it were to split 20-to-1 today, new shares would be worth about $145 apiece. There is also what is known as a “reverse stock split,” when a company combines a number of shares into a single share, at a higher price. General Electric, for instance, did an 8-to-1 reverse split in August, when its shares were valued at less than $13.

Why split? 

  • Attract more individual investors: “You just reach a point where you run out of people in the world who are willing to afford a $2,500-, $3,000-per-share stock price,” said Brad Erickson, an internet analyst at RBC Capital Markets. Share prices for tech stocks have soared as the industry has grown over the past decade, putting many of those stocks out of reach for smaller investors. Alphabet was trading at around $2,750 when it announced a 20-to-1 split in February.
  • Increase liquidity: By lowering the price of individual shares, investors can more easily buy and sell them, which increases liquidity, or the ease with which shares can be converted into ready cash without impacting their market value.
  • Boost share price: A split itself does not increase the value of a company’s shares, but they often trade up after the split. Stocks that have announced a stock split, rose 25 percent on average over the next 12 months, versus 9 percent for the broader S&P 500, according to Bank of America.
  • Compensation flexibility: Employees often receive company shares as part of their compensation. Lower-priced shares offer employees more flexibility to manage their investments, particularly if they want to sell. More affordable shares may also benefit companies as they restructure compensation packages to compete in a tight labor market.
  • Qualify for the Dow Jones Industrial Average: The Dow, which comprises 30 stocks, is the most prestigious of the three main indices, the others being the Nasdaq and the S&P 500. The Dow tends to exclude companies with very high share prices. Share price is not the only criterion for inclusion, but a lower share price may make it easier for a company like Amazon, which trades on the Nasdaq, to clear the bar. Inclusion in the Dow also means inclusion in exchange-traded funds that mirror the index and are heavily bought by institutional investors like mutual funds.
  • Optics: Splits reset share prices, and the new shares have their own trading histories, which are reflected in charts and graphs tracking their value over time. If a stock has taken a big tumble before it splits, the drop will no longer be front and center to remind investors of what has been lost.
  • Buzz: Stock splits makes headlines and get attention on social media, which can boost a company’s profile and attract investors.
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