What are stock splits?

What are stock splits

Stock splits are when a company issues additional shares by splitting its current shares by a certain amount. For example, if a company is worth $100 and performs a 5/1 stock split each share is then worth $20 and there are 4 additional shares for each share that existed prior to the split. 

So if you had 100 shares of the company before the stock split, after you would have 500 shares. The total value of all the shares put together will be the same because the price was divided by 5 as well, but there’s an opportunity to build more equity.

Let’s dive into why companies split their stock and what it can mean for you.

Why do companies split their stock?

Companies split their stocks mainly to attract more investors. Stock splits mean lower share price and more available shares. This can make their shares more accessible to investors. 

Additionally, to the benefit of the company, this does not affect their market capitalization. The value of all outstanding shares added together stays the same, there are just more outstanding shares at a lower price.

What do stock splits mean for Investors?

Depending on the split ratio (2:1,5:1 etc.) shareholders will receive additional shares for each share they were holding before the split.

For example, in a 5:1 split scenario, an investor would receive 4 additional shares for each one they originally held. If an investor had 100 shares before a 5:1 split they would receive an additional 400 shares for a total of 500 shares after the split.

Companies that recently split their stock

When looking at recent stock splits that have occurred recently two notable ones are Nvidia (4:1 split 7/20/2021) and CSX Corp. (3:1 spit 6/29/2021).

 NVDA closed on July 19th at a price of $751.20 and after their 4:1 split (and small after-hours movement) opened at a price of $187.30 per share ($749.2 according to pre-split ratio).

NVDA stock performance from Split to May 27th

CSX Corp closed on June 28th at a price of $95.31 and after their 3:1 split and after-hours movement opened at a price of $32.32 per share ($96.96 according to pre-split ratio).

CSX Stock performance from Split to May 27th

Upcoming stock splits

The upcoming stock splits this summer are very interesting and are largely being done in the technology sector. 

Alphabet, Google’s parent company ($GOOG), and Amazon ($AMZN) are set to split. Their stock prices are in the four figure range per share, making them unreachable to many investors. Both companies will be splitting 20:1 which is a very large ratio. 

Amazon is currently trading at  $2,135.50 (5/25 close) and will also be trading at roughly $100 per share if split from this price on June 5th.

Google is currently trading at $2,116.79 (5/25 close) and a 20:1 split from here will lower the price per share to just over $100 on July 15th.

What do I do with this information

As you can see from the NVDA and CSX charts, a stock split doesn’t guarantee better stock performance.

However, if you want to buy Google and Amazon, but their stock prices were just too much, this might be a good time to finally get in.

If you have the cash available, one strategy you could investigate is buying 5 shares of both Google and Amazon in your TFSA before the stock split. After the split you’ll have 100 shares of each company and be able to write covered calls.

If you’re not familiar with covered calls, read through our Options for beginners series to learn more.

But don’t buy any stock purchases unless you are completely comfortable with your own rationale behind the decision.

That’s all for now.

Happy trading,

Your fellow Stock Hackers,

🍒Cherry & Erwin

P.S. The market dropped almost 20% between January and June this year. Many are worried it could keep going. Will the market crash? What are you supposed to do if it does crash? We unpack all of these questions in our latest FREE report, “What to do if the Market Crashes in 2022.” Download your free copy now!

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