Here’s what you need to know about stock splits

First Amazon, soon Tesla
Here’s what you need to know about stock splits

Amazon warehouse in Montreal, Canada

© IMAGO / ZUMA Press

Amazon recently had its long-announced stock split, and other tech companies like Tesla want to follow suit. What does the scam mean to private investors

Apple and Amazon have already done it, and Tesla and Alphabet plan to do just that: a stock split. After the hype of the past few years and, in some cases, generous share buyback programs, US tech companies have prices so high that it is difficult for many private investors to get into them without focusing on shaping the risks in their portfolios. A stock split makes the price more visually appealing.

But what does equity participation actually mean for investors and private companies? Answers to the five most pressing questions:

What happens in a stock split?

To understand a stock split, investors can think of the market value of a company’s stock as a pizza. Each investor keeps a small piece of this pizza in his portfolio via his shares. When Amazon split its stock 1 for 20 on June 6, the online retailer sliced ​​each of those parts into 20 smaller pieces. Thus, investors with one share own twenty shares after the split. The cycle decreases accordingly. Amazon example: The split occurred at a rate of $2447, after which the price was twenty, i.e. $122.35. However, ideally, the data providers adjust prices in such a way that the stock split doesn’t look like a glaring crash, but visually proceeds smoothly.

What are the changes in stock split?

Aside from the fact that the value of the stock market breaks down into smaller pieces, basically nothing changes. The valuation, such as the price-to-earnings (P/E) ratio, remains the same. In the case of tech stocks, this is mostly up after the rally in recent years. So while stocks seem affordable again, they are still very expensive. On Amazon, the P/E ratio is still above 50, and the level around 20 is considered preferred. The dividend will also be divided into smaller parts in the future, so the bottom line is that the investors will get the same amount in the distribution.

Is it worth entering after a stock split?

Whether the stock costs several thousand or a few hundred euros, that makes a big difference, especially for private investors. Many can only get started at that time. Therefore, the price usually rises immediately after the stock split. However, the Amazon example also shows that the company cannot escape the fundamental negative trend of the stock market currently. After the split, Amazon’s price was up 2 percent, more than the US tech Nasdaq, which was up just 0.4 percent at the same time. Trading volume was also higher than usual, but then the price fell again, having fallen since June 7 by about 13 percent. The stock split says nothing about whether the time to go in is right now.

What do companies expect from stock splits?

Wall Street’s trend toward stock splits has a clear motive: companies secure a place in the US Dow Jones Index, one of the few lists of stocks in the world that is weighted by price rather than market capitalization. Thus companies whose price is relatively high have a huge impact on the general index; If its price collapses, the index goes down with it. However, since inclusion in the stock scale, which launched 126 years ago, is a prize, Apple has regularly conducted stock splits ahead of Amazon so as not to become too dominant.

And with the stock split announced, Tesla is only following the tech giants’ heels. The electric car maker is not likely to enter the Dow Jones Index – the index operator has not officially commented on this. At the current price of $624, Tesla’s stock is far from the pre-split price level of Amazon or Google’s parent Alphabet, which was listed at €2,075.50. That raises suspicion that Tesla chief Elon Musk primarily wants to use the split, which shareholders will vote on at its annual general meeting in early August, to keep track. However, it is not expected to be able to reverse the overall negative trend in the long term.

Would stock buybacks be better for the price?

In conjunction with the split earlier this year, Amazon announced a $10 billion share buyback program for the first time since 2016. The company is buying shares from the market. As the number of securities decreases, the value of individual shares increases. With such a program, companies want to demonstrate their willingness to support the cycle in trying times and thus send a positive signal to shareholders. Even if a stock buyback program does not increase prices on a specific date, it is still a stronger entry signal than a stock split.

Leave a Comment