A stock split is when a company increases the number of total shares available to trade to boost its liquidity and make it more accessible to investors. At the same time, the price of the share decreases because there are more shares in the company.
The value of the company before the stock split remains the same after the stock split.
Why would a company do a stock split?
By doing a stock split, it has the effect of lowering the price the stock will trade at, as there are more bite size pieces of stock with the same total value as before. This lower share price makes it possible for more investors to buy the stock, which can sometimes increase the demand for the stock.
Does the value of the company change from a stock split?
The value of the company should remain the same. Even though there are more shares available, those shares should go down in price by the same amount to reflect the identical value of the company.
Imagine you have a pizza. You can choose to eat the pizza without cutting it or cut the same pizza into lots of equally sized slices. No matter how you look at it, the size of the pizza remains the same.
That said, the share price of both Tesla and Apple performed well soon after each announced a stock split in 2020 because the sentiment can reflect a short term burst of extra demand. This could be because the stock may soon trade at a lower price per share.
Alphabet announced a stock split
In February 2022, Alphabet (stock code: GOOGL) announced a 20-for-1 stock split. If shareholders approve the split in an upcoming vote, the split would take place on July 1st, 2022. Anyone holding one stock in Alphabet (the parent company of Google) before the ex-split date would hold 20 Alphabet shares after that date.
In 2022, one Alphabet share is currently fetching almost US$3,000. By splitting the stock 20-for-1, everyone who currently owns Alphabet stock will receive an additional 19 stock for each one that they own. Through this process, the price of the stock should go down by a multiple of 20, in order to keep the value of the company the same during the split process, meaning each share will trade closer to US$150 a share. This lower price should make it easier for more investors to get their hands on Alphabet stock.
Have there been other stock splits in big Tech before this?
Yes! There have been many examples of stocks in big Tech. Tesla did a 5-for-1 stock split in August 2020. Apple is another tech giant that did a stock split in 2020, this time a 4-for-1. In its history, Apple has done five stock splits.
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