Key Takeaways
  • On March 9, 2022, Amazon approved a 20-for-1 stock split to increase the number of shares in circulation and reduce its stock price.
  • The stock split means that for every one share an investor has, they will receive 20 shares which will add up to the share value before the split.
  • Although stock splits typically benefit investors, it is vital to research why a company may be looking into performing stock or reverse stock split.
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On March 9, 2022, Amazon approved a 20-for-1 stock split. The split means that each shareholder, by the end of May 27, 2022, will receive 19 additional shares when the transaction occurs. Amazon’s announcement led to a 6% rise in its price, and the tech stock has continued to rise ever since. Although they did not disclose when the stock split will occur, there is speculation that it will happen around June 3, 2022. 

 

How a Stock Split Works

 

When a company’s board of directors wishes to increase the number of shares outstanding, they will make a formal announcement. In the formal statement, the company discloses three key things. First is the rate of the stock split, which dictates how many new shares will be given for each outstanding share. The second thing is when a shareholder must be in possession of a share if they wish to reap the benefits of the stock split. The last thing is the official day the stock split will occur. 

 

 

Why Amazon is Doing a Stock Split

 

As of March 31, 2022, Amazon (NASDAQ: AMZN) is currently trading at 3,303.54 USD. Due to its high share price, investors who do not have enough money to purchase one share are left with two options–buy fractional shares or nothing at all. The high price for a single share makes it difficult for most retail investors to purchase an Amazon share, which led the e-commerce giant to increase the number of shares in circulation to lower its price. 

 

Other Companies Doing a Stock Split

 

Alphabet

 

Editorial credit: IgorGolovniov / Shutterstock.com

 

About a month prior to Amazon’s announcement of splitting its stock, Google’s parent company, Alphabet, also announced they would be doing a 20-for-1 stock split. Similar to Amazon, due to its significant common stock price, its reasoning is to lower its share price and make it more affordable to the average investor.

 

Tesla

 

Editorial credit: Grisha Bruev / Shutterstock.com

 

The electric vehicle company has not formally announced a stock split yet. Still, it has been confirmed that they are in the process of holding a vote with shareholders to authorize additional shares and begin the process of a stock split. Upon the report that Tesla was seeking approval for more authorized shares was disclosed to the public, its share opened at 6.4% higher than the previous day’s close.

 

Tech Companies and Stock Splits

 

There is a common theme between these three companies; they are located within the same sector of the stock market. These tech companies’ shares are viewed as growth stocks, which means they are expected to grow faster than the expected market average. The high growth results in high demand from Wall Street stockbrokers and regular investors because they wish to make a nice profit.

 

Impact of Stock Split Announcements

 

A stock split impacts the historical stock price graph. Since the historical chart displays the price, it charts dependent on the number of shares outstanding. Thus, the graph goes through a split-adjusted basis change when a stock split occurs, meaning the historical prices will be updated with the current number of outstanding shares. 

 

Furthermore, another impact caused by a stock split is its effect on certain financial ratios. One of the most common ratios used to evaluate a company’s profitability and performance is Earnings per Share (EPS). The EPS formula is equal to the company’s profit divided by the number of shares outstanding, and it is used to determine how much profit is made per share outstanding. The higher this value is, the more appealing it is to investors, as they are led to believe the company is highly profitable.

 

Risks with Stock Splits

 

When a stock split occurs, the number of outstanding shares increases. The increase, in return, lowers the EPS, a financial ratio used to measure profitability per share. 

 

When a stock repurchase occurs, more commonly known as a reverse stock split, one potential factor behind a company doing this may be because they want to increase the EPS. As a result, a stock repurchase has the opportunity to manipulate vital financial ratios that investors look at and lead them to believe that the company is more profitable than it actually is. Therefore, when a company announces a stock repurchase or stock split, it is essential to look at its financial statements and try to make an accurate assumption regarding the motives behind this financial transaction. 

 

With the ongoing trend within the tech industry of companies with high market capitalization announcing stock splits, it is important not to follow the herd and begin investing in these companies blindly. Although these companies are established and well known internationally, building the habit of doing research before investing is a crucial skill to have, especially when investing in smaller companies.

 

 

Disclaimer: The information above is NOT financial advice. Invest at your own risk, and CapWay is not responsible for any losses incurred on investments. 

 

 

Main Image/Thumbmail - Editorial credit: Sundry Photography / Shutterstock.com

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