Market

Why Do Stocks Split?

It’s perhaps one of the most overrated events in the stock market; the stock split. So what exactly happens in a stock split? Exactly what it sounds like! The company chooses to split the total number of shares outstanding. This means the underlying stock price will also rise or fall, depending on how the company split the stock. 
Many investors believe that a stock split means their position in the stock will increase in value. The truth is, if we think of an investor’s stock position like a pizza, then a stock split just cuts that position into a larger number of slices.

Stock Splits vs Reverse Stock Splits

Why Do Stocks Split

There’s also the rare occasion where there are fewer slices in the case of a reverse stock split. But more on that later! In general, splits are pretty rare these days. With mega-cap tech companies seemingly unbothered by the price of their stock continuing to rise, there’s no sense of urgency to lower the price of the stock to appeal to retail investors. So are they good, bad, or neutral? Let’s dive a little deeper into the unique stock market event!

One of these is better than the other! Well, for the most part anyway. A regular split is what we traditionally think of when a company announces they are splitting their stock. A reverse stock split consolidates the number of shares. Then increases the price of the stock. Why would a company want to lower the number of shares and raise its stock price through a reverse stock split?

There are numerous reasons why a company would choose to do this but one of the more common ones is because the stock simply is underperforming. If a company believes that a high stock price is equated with high performance, then it may undergo a reverse stock split. IN essence to artificially raise the price of the stock. Generally speaking, this doesn’t sit well with shareholders. 

But there are also some practical reasons as to why a company would want to execute a reverse split. The NASDAQ index requires all stocks listed on the exchange to be trading for more than $1.00 per share. If the stock is below $1.00 per share for 30 days, it’s subject to being delisted. The Dow Jones is a price-weighted average, which means that stocks with higher share prices get a higher weight in the average.

Why do Companies Split Their Stocks?

Why Do Stocks Split

Companies used to get concerned when the share price of their stock rose too high. It was believed that a higher stock price would prevent most smaller investors from being able to invest in the company.

This would mean the stock would primarily be traded by institutional investors. Of course, this was also before the invention of things like fractional shares and ETFs. These instruments make it easy for any investor to own a part of a company. No matter how small of an initial investment they have. 

I went over how some of the major indices have guidelines and regulations about the price of stocks. Being delisted isn’t ideal for stocks. They’d most likely be relegated to the over-the-counter markets. Which are less regulated and have much more volatility. There’s also a certain prestige that comes with having a higher stock price.

One recent example of a high-profile reverse split was General Electric (NYSE: GE). In July of this year, General Electric carried out a 1 for 8 reverse stock split. This means investors would own 1 share of GE for every 8 shares they owned before.

Why is this significant? Many believe that GE executed this reverse split to boost its stock price over $100.00 per share. This is in hopes of once again being re-added to the prestigious Dow 30. 

Overall, a split is generally seen as a positive catalyst for the market. A share price that has risen to the point of splitting, usually means that the company is performing well.

We often see a pre-split surge as investors try to scoop up as many shares as they can before the actual split. It’s definitely a psychological signal that makes us believe that having more shares of the stock, means we have a larger investment. 

Some Recent Splits

Why Do Stocks Split

We’ve actually had quite a few high-profile splits over the past couple of years. This is another reason why theyre a hot topic of discussion. Remember that these days it’s rare to see a stock splitting. So when these well-known stocks announced their splits, it was the talk of the markets! Let’s take a look at some of the bigger stock splits in recent history.

Tesla (NASDAQ: TSLA): This stock split came at the height of the bull market in 2020. In August of 2020, Tesla announced a 5 for 1 stock split, which sent the markets into a frenzy. From the day that CEO Elon Musk announced the split to the day it actually happened, the share price of Tesla rose by over 80%.

Since the split, shares are still up over 85%. And the stock is rising so much that some investors are speculating another split may come over the next couple of years. 

Apple (NASDAQ: AAPL): Apple’s fifth stock split came right after Tesla’s at the end of August 2020. Shares of AAPL also surged into the split. Although just three weeks later the stock had pulled back by about 20%.

The split was a 4 for 1 split. And since then the stock has been a little disappointing. Apple certainly hasn’t performed as well as Tesla over the past year. The world’s largest company has actually lagged the benchmark S&P 500 index over that time. 

NVIDIA (NASDAQ: NVDA): NVIDIA was probably the hottest stock of 2021. The company announced a surprising 4 for 1 stock split in July of this year. The chip-making behemoth has split four other times in its history as a publicly traded stock. Shares are up slightly since the split. They’re up around 70% over the past year. 

The Trade Desk (NASDAQ: TTD): The Trade Desk is a popular digital advertising stock. And it’s one of the best performers over the past five years. The stock has gained over 2,500% during that time. Itwas known as an expensive stock. But the company announced a massive 10 for 1 stock split back in June of this year; bringing the price down from $600 to $60. In the time between the announcement and the split date, shares of the Trade Desk rose from $60 to $83. 

The Stocks that Just Won’t Split

We all know the stocks that need to split but just won’t. At this point, it seems nearly impossible for smaller investors to own any shares of Amazon (NASDAQ: AMZN) or Alphabet (NASDAQ: GOOGL), aside from fractional shares. Amazon is currently trading at around $3,425.00 and Alphabet is trading at $2,844.00 per share.

Since new CEO Andy Jassey has taken over the corner office, many investors and analysts have speculated that Amazon’s stock will split. Most believe that it was former CEO and current Executive Chairman Jeff Bezos that was keeping Amazon’s stock price as high as it is. Amazon shares surged into the last quarterly earnings call, when many believed a stock split would be announced. Unfortunately, no announcement was made, and there doesn’t seem to be any plans for Amazon or Alphabet to split their stocks anytime soon. 


A few other stocks could probably do with a split as well. Latin American eCommerce giant MercadoLibre (NASDAQ: MELI) currently trades at $1,869.00 per share, Shopify (NYSE: SHOP) trades at $1,444.00 per share, and Booking.com (NASDAQ: BKNG) trades at a whopping $2,491.00 per share. In my opinion, most retail investors simply cannot afford more than a few shares at the most. Which is unfortunate for those who really want to be invested in these great companies. 

Conclusion

Although a lot of stocks have split at some point in their history, the event is happening less frequently nowadays. Part of the reason is companies simply care less about how high their stock prices get. With the introduction of fractional share investing and ETFs, investors can get exposure to these stocks without having to pay thousands of dollars a share. As to the question of why companies split their stock? There’s a multitude of reasons why a company could decide to execute a normal or reverse stock split. But remember, no matter what our brains tell us, it’s all just more or less slices of the same pizza. 

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