Companies typically engage in a stock split so that investors can more easily buy and sell shares, otherwise known as increasing the company’s liquidity. 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. For existing shareholders of that company’s stock, this means that they’ll receive additional shares for every one share that they already hold.
“If your current stock is valued at $100 per share and there is a 2-for-1 split, you will have two shares worth $50 each,” explains Brian Stivers, investment advisor and founder of Stivers Financial Services.
Using Amazon’s 20-for-1 stock split as an example, 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 of the original value. The market value of the company, however, does not change.
In short, Amazon stock is going to become a lot more affordable to the everyday investor who wants in.
Though the net value of an existing shareholder’s stock doesn’t change with a stock split, the new level of demand that can come as more investors purchase the more affordable shares can be beneficial to current investors.
The share price would likely increase again as more investors purchase shares, Stivers says, adding that in the long run, current shareholders could see some potential value increases, though perhaps temporary.
For current Amazon shareholders, the 20-for-1 stock split also frees up some shares to be sold.
“With 20 times the share, it would allow you as an investor to diversify further, if you want to liquidate some of the Amazon shares to diversify further into other holdings,” Stivers suggests. “This would especially be true if the new split stock increases rapidly in value.
It’s tempting to want to buy into a pricey stock when it becomes much cheaper to do so; however, eager investors should make sure that stock aligns with their overall investing goals. You shouldn’t jump all in just to say you own Amazon stock, for example, unless it’s something that has long been a part of your portfolio objectives.
“If the average investor was attracted to Amazon before the split, then it is probably a good time to invest after the split, as it is more obtainable,” Stivers says. “However, you should only do so if it is part of a well-diversified portfolio.”
A diversified portfolio means that your money is spread out amongst different asset classes (stocks, bonds, real estate, etc.) that react differently to various economic and financial environments. This minimizes volatility while maximizing return opportunity. Robo-advisors can build a diversified portfolio of index funds for you based on factors like your age, risk tolerance and time horizon.
