INVESTING

Stock Splits

During the first half of 2022, there were talks of major corporations including Amazon and Google that planned on splitting their stock. In June of 2022, Amazon initiated a 20:1 stock split. In this article, I’ll highlight what a stock split is and how it benefits smaller investors.

A stock split is a decision by a company’s board to increase the number of outstanding shares. Outstanding shares are all the shares that have been issued and purchased by investors. Companies do this by issuing more shares to the current shareholders. When a stock is split, the stock price changes and the number of shares changes, but there is no change to the market capitalization. Market capitalization is the value of a company that is traded on the stock market. The number of shares increases, while the price of stock decreases proportionately.

The most common split ratios are 2:1 or 3:1. This means that for each share the shareholder owned before the split, they get two or three shares. Amazon split 20:1 which caused a price change from $2,447 to $123 per share. A stock split can be beneficial for the company because it can increase the stock’s liquidity and marketability.

How can this benefit a small investor? A stock split decreases the stock’s price, which can make the stock more affordable. With the price decreasing due to the split, many investors will buy the stock at the new price. And, as the demand for the stock increases, it will drive up the new price.

Understanding how stock splits work and keeping up to date with the latest company trends may be a way to get a start in the stock market.