Investors love the idea of stock splits. Companies tend to split their stocks when the share price makes it difficult for retail investors to buy. If the share price of a stock gets too high, it may affect market liquidity since there are fewer investors who can afford to buy the stock.
Publicly traded companies also split their stock when they want to create more shares and make them easier to trade. Lowering the price through a stock split increases the number of outstanding shares, which can narrow the spread between the bid and ask price, giving investors a better price when they trade.
What Is an Example of a Stock Split?
When a stock split occurs, it lowers the company’s share price relative to the split. For example, if a stock is trading at $20.00 per share and a company announces a 2-for-1 stock split, the number of outstanding shares will double, and the share price will fall to $10.00 per share.
After the split, the total investment value remains the same. If an investor owned 25 shares before the split, priced at $20 each, the total value is $500. After the stock split, the investor would own 50 shares valued at the new price of $10, for a total value of $500.
A stock split doesn’t change a company’s fundamentals or make it more valuable; the company’s market capitalization will stay the same, but the number of outstanding shares will increase.
That said, a stock split can make it more affordable, which in turn, helps increase investor sentiment.
Does a Stock Split Lead to an Increase in the Share Price?
A high-flying stock can announce a stock split, which can boost demand and drive the price up. This doesn’t always happen, but stock splits are seen as a positive move by investors.
A study conducted by Nasdaq looked at stock splits by large-cap companies from 2012 to 2018. It found that just announcing a stock split increased the share price by an average of 2.5% and that increase helped the stock outperform the market by almost 5% after just one year.
Research conducted at the University of Colorado’s Leeds School of Business found that price performance of stocks that had split outperformed the market by an average of 7.93% after one year and an average of 12.15% over three years.
In May 2021, NVIDIA Corporation announced a 4-for-1 stock split to make shares “more accessible to investors and employees, thus increasing liquidity in the stock.” Between May 21, when NVIDIA made the announcement, and July 19, the date of the actual split, the company’s share price advanced 20%.
What Are Some of the Bigger Stock Splits in 2022?
This year has been a banner year with some of the biggest companies announcing stock splits. None of the stocks featured here should be taken as recommendations. These are simply examples of notable companies that have announced stock splits this year.
Tesla Inc is the largest electric vehicle (EV) company in the world, with a market cap of $908.4 billion and global EV market share of roughly 25%. In North America, Tesla has captured more than 70% of the market share of electric vehicles. The company offers 16 models and delivered around 255,000 EVs in the second quarter of 2022.
Tesla’s first stock split was in August 2020, which was a 5-for-1 stock split. In 2020, the Tesla stock surged 695%, closing out the year at approximately $695 per share.
On August 5, 2022, Tesla announced a 3-for-1 stock split to make its shares more affordable to investors and employees. On August 25, 2022, the new adjusted stock split began trading.
Amazon.com has been one of the biggest growth stock stories over the last two decades. Since starting out as an online bookstore in a garage in 1994, Amazon has grown into the world’s largest e-commerce store, a $1.36 trillion e-commerce juggernaut.
Through strategic developments and acquisitions Amazon has evolved into more than just an online retailer. Over the years, Amazon has acquired iRobot, the name behind the robotic vacuum Roomba, Ring, the smart doorbell company, and Blink, the smart camera and doorbell startup.
It also owns the Kindle e-reader, Fire tablets, Fire TV, Alexa, Echo, Cloud Cam, and Amazon Prime. In 2017, it acquired Whole Foods Market for $13.7 billion and spent $3.9 billion to buy primary care provider One Medical.
The company’s broad reach has helped it achieve consistently strong financial results which adds value to its share price. In March 2022, the company announced a 20-for-1 stock split.
On June 3, 2022, the day before the split went into effect, Amazon shares were trading well above $2,000. After the split, Amazon shares were revalued at $120 per share.
This is the fourth stock split Amazon has announced since it went public in 1997.
Palo Alto Networks
Palo Alto Networks Inc., one of the world’s leading cybersecurity companies, recently announced a 3-for-1 stock split on August 22. The company posted better than expected fourth quarter financial results and provided a strong forecast for the October quarter and fiscal 2023.
Palo Alto’s share price has been one of the best performing cybersecurity stocks. Since the start of 2020, the company’s share price has rallied more than 125% to around $540 per share. The sharp increase has put the Palo Alto stock out of reach for many investors.
As a result, the company declared a 3-for-1 stock split in order to make its stock more accessible to employees and a broader base of investors. Palo Alto will begin trading on a post-split basis on September 14.
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