By STAN CHOE
Updated [hour]:[minute] [AMPM] [timezone], [monthFull] [day], [year]
NEW YORK (AP) — In some rare cases, a lower stock price can actually be a boon for investors.
Consider Nvidia, the chip company whose stock price has soared well above $1,000 as Wall Street’s frenzy around artificial-intelligence technology keeps revving higher. The company recently said it would undergo a stock split, where each of its investors in early June will get nine additional shares for every one that they already own.
Such a split should send Nvidia’s stock price down by about 90%, all else equal. Each investor would still, though, hold as many total investment dollars in Nvidia as before the split.
Nvidia said it’s making the move to make its stock price more affordable for its employees and for other investors. An investor may be more willing to buy a stock with a $100 price tag than one that costs $1,000, even if some brokerages allow investors to buy fractions of a company’s share.
What’s more, if history is a guide, Nvidia could see its stock prices continue to rise more than the rest of the market. “Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index,” according to the BofA Global Research’s research investment committee.
Of course, some of that outperformance may be because companies that tend to undergo splits usually do so only after a run of success where their stock prices have climbed strongly. And a stock split doesn’t guarantee an ensuing rise in price. Look at Tesla, which fell nearly 12% in the year after it announced a three-for-one stock split on Aug. 5, 2022. The S&P 500 rose 8% over that same time.
Tesla was one of the 30% of companies that announced stock splits that saw their share prices drop in the ensuing year. A few outliers that did particularly well, such as Copart’s 56% following its October 2022 announcement, also helped drive up the overall numbers.
But the strategists at Bank of America found that the edge in performance for companies that announce stock splits also carried through all kinds of different markets. That includes not only 1990 to 1999, when the U.S. economy kept powering higher, but also from 2000 to 2009 when the dot-com bubble and then the housing bubble burst.
The strategists said in a BofA Global Research report that stock splits could also offer an easier way for companies to help their shareholders, rather than pumping cash into repurchases of their own stock, which may look expensive as stock indexes sit near record highs.
Eight companies have announced stock splits so far this year, according to Bank of America, including Walmart and Chipotle Mexican Grill. That’s down from the booming days of the late 1990s when more than 60 companies routinely announced splits each year.
FAQs
Lower prices attract more investors: A lower post-split price is more accessible to retail investors. 7. Liquidity hypothesis: As we've seen, many argue that stocks trading at lower prices after a split are more liquid, attracting more investors and increasing trading volume.
How do stock splits affect investors? ›
A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder's stake remains the same.
Can a stock split be used to keep the stock price affordable? ›
Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionally, while the market capitalization and the value of the company do not change.
Why would a company want a lower stock price? ›
Risk of Takeover
Bidders who seek to take over a company by obtaining a majority of shares can more easily afford to do so when the stock is trading at a lower price.
Why do people care about stock splits? ›
Do stock splits benefit investors? – It's nice to own more shares after a split, since the reduced per-share price might mean there's room for greater potential price growth. But investors shouldn't buy a stock simply because they hope it'll rise in price after a split.
What is the best reason for stock split? ›
Stock splits make shares more accessible to a broader range of investors by making the shares more affordable. This reduction attracts more investors and enhances trading volumes. Also, it boosts liquidity and makes it easier for investors to buy and sell shares.
Who benefits from a stock split? ›
It increases liquidity
Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter.
Is there a downside to stock splits? ›
Disadvantages of a Stock Split
A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.
Is it better to buy before or after a stock split? ›
The case for buying before the split
A stock split doesn't change anything fundamental about a company or its stock. Though the per-share price will be lower, the maneuver doesn't impact valuation in any real way. That means that post-split, the stock actually could be more expensive than it was beforehand.
Why do companies do reverse stock splits? ›
A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares. Remaining relevant to investors and avoiding share delisting are the most common reasons corporations pursue this strategy.
Stocks tend to significantly outperform the market in the 12 months after a split. A split improves the tradeability of a stock which reduces the company's cost of capital, positively affecting its fundamentals and pushing its valuation higher.
What happens to the price of a stock when it splits? ›
Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.
Is a lower share price better? ›
The low-priced stocks are cheaper, and hence they are considered highly volatile. Naturally, they have higher to fall rapidly in price because they rise and fall in a short span and frequently. Hence, investors looking for security and stable stocks don't prefer low-priced stocks.
Is a low stock price bad for a company? ›
If the stock price falls, these investors lose money, not the company. There are some very serious secondary effects, though, on a company resulting from stock price declines. Remember, a company's stock can be used as a sort of currency.
What are two ways investors make money on stocks? ›
There are two main ways to make money with stocks:
- Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. ...
- Capital gains. Stocks are bought and sold constantly throughout each trading day, and their prices change all the time.
A company may reduce or cancel the nominal value of its shares in exchange for non-cash assets if it has any that it would want to give to shareholders and the company may reduce capital for any purpose, as long as the total amount of the reduction is not needed for the company's continuing operations.
How does a stock split affect the value of a company? ›
A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company.
Do stock splits increase the par value per share? ›
A stock split occurs when a Board of Directors authorizes a change in the par or stated value of its stock. This reduction in par value is made to lower the market price of the stock to make the stock more attractive to potential investors.
Is it beneficial to buy a stock before it splits? ›
The case for buying before the split
A stock split doesn't change anything fundamental about a company or its stock. Though the per-share price will be lower, the maneuver doesn't impact valuation in any real way. That means that post-split, the stock actually could be more expensive than it was beforehand.
