Is It a Good Thing When a Company Splits Its Stock?
Last month, Google announced they are going to be splitting their stock price in a 20-for-1 stock split. And just last week, tech giant Amazon is proposing a 20-for-1 stock split as well. Very interesting announcements.
What is a stock split?
Companies typically engage in a stock split so that investors can more easily buy and sell shares. Stock splits divide a company’s shares into more shares, which in turn lowers a share’s price and increases the number of shares available. This means that you’ll receive additional shares for every one share that you already have.
Let’s use a pie of pizza (the stock) as an analogy. We have this one large pepperoni pizza on the table (aren’t you all of a sudden hungry?). There are 20 people in the room and each person wants a slice.
The total cost (value) of one whole pizza is $2,000. Remember, each person wants a slice and there are 20 hungry people waiting for it. That’s similar of a 20-for-1 pie split, right? So, after slicing the pie for all 20 people, the cost (value) of each slice is now worth $100 each ( 20 x $100 = $2,000). The total cost (value) of our 1 pepperoni pizza is still $2,000 (1 x $2,000) but it has now been divided into 20 slices ( 20 x $100).
Using Amazon’s 20-for-1 stock split for more clarity, existing shareholders will get 20 shares for each share they currently own. When a company divides each existing share into 20 new shares, that also means that each share is now worth one twentieth (1/20 x 2,000) of the original value. The market value of the company, however, does not change.
Should you take advantage of a stock split?
It’s tempting to want to buy into an expensive stock when it becomes cheaper. However, investors should make sure that the company aligns with their overall investing goals. You shouldn’t jump all in just to say you own Amazon stock, unless it’s something that has long been a part of your portfolio objectives.
If you were attracted to Amazon or Google before the split, then it is probably a good time to invest after the split.
Google and Amazon stock is going to become a lot more affordable to the everyday investor who wants in. That could actually be a good thing.