Are Stock Splits Good or Bad for Your Investment Strategy?

Stock splits can be a double-edged sword for your investment strategy. A stock split can increase a company's stock price, but it doesn't change the company's underlying value.

Many investors assume that a stock split is a sign of a company's success, but it's not always the case. In fact, some studies have shown that stock splits are often accompanied by a period of underperformance.

A stock split can make a company's stock more attractive to individual investors, but it can also make it more expensive for institutional investors to buy or sell the stock. This can lead to a decrease in trading volume and liquidity.

Some companies, like Apple, have used stock splits to increase their stock price and make their stock more accessible to individual investors.

Stock splits can make shares more affordable for smaller investors, like those who use option contracts for risk management. This is because a lower share price makes it easier to acquire shares, especially for those who can't afford the higher-priced stocks.

Some companies split their shares to meet the requirements of certain stock indexes, like the Dow Jones Industrial Average, which is price-weighted. This means a company needs to have a share price within a certain band to be included in the index.

A stock split can also be seen as a sign of confidence from management that the company is doing well and will continue to generate profits and growth. This is because some companies and analysts view a stock split as a positive signal.

For example, Amazon's 20-for-1 stock split in 2022 made its shares more affordable, with the price dropping from around $2,785 to around $139. This made the stock more attractive to investors.

Some investors perceive a stock split as a "deal" because they can buy more shares at a lower price, even though the value of the company hasn't changed. This is because a lower stock price allows investors to buy more shares, which can make the stock seem more appealing.

Companies like Berkshire Hathaway and Alphabet have chosen not to split their shares, even with high prices. Berkshire Hathaway's shares trade for around $463,000 each, while Alphabet's shares were around $2,750 before its 20-for-1 split in 2022.

A reverse split can reduce trading volatility by increasing the price of shares, making trades more expensive and potentially dampening speculative trading. Companies may also use reverse splits to keep their share price above a certain value, like $1, to avoid being delisted from their exchange.

Historically, bullish outcomes tend to follow stock split events, often in the form of higher earnings expectations and sometimes earnings growth.

Some active traders used to buy a stock a few weeks before the split and sell it just a few days before the actual split, but this tactic is now less reliable due to enough traders figuring it out.

The net value of an existing shareholder's stock doesn't change with a stock split, but the new level of demand can be beneficial to current investors.

The share price would likely increase again as more investors purchase shares, which could lead to potential value increases for current shareholders, though perhaps temporary.

For current Amazon shareholders, the 20-for-1 stock split also frees up some shares to be sold, allowing investors to diversify further if they want to liquidate some shares.

Warren Buffett and his team at Berkshire Hathaway don't believe in stock splits. They think the stock should "parallel" the value the company has accumulated over time, which is why they don't split the A-shares.

As of May 2023, a single A-share of Berkshire Hathaway was trading for about $500,000, more than the cost of an average American house. This is a stark contrast to the more affordable B-shares, which trade at around $325 per share.

The B-shares are splittable, and in fact, did a 50:1 split back in 2010.

Historically, bullish outcomes tend to follow stock split events, often in the form of higher earnings expectations and sometimes earnings growth.

Some active traders used to buy a stock a few weeks before the split and sell it just a few days before the actual split, but this tactic is now less reliable due to many traders figuring it out.

A stock split can be beneficial for current investors as it can lead to increased demand and a higher share price, potentially increasing their value in the long run.

The net value of an existing shareholder's stock doesn't change with a stock split, but the new level of demand can be beneficial to current investors.

Current shareholders of a company that undergoes a stock split may see some potential value increases, though perhaps temporary, as the share price increases with more investors purchasing shares.

A stock split can also free up shares to be sold, making it easier for investors to diversify their holdings.

With a 20-for-1 stock split, current shareholders can sell some of their shares to diversify further into other holdings, especially if the new split stock increases rapidly in value.

To make the most of a stock split, you need to be a shareholder by a certain date specified by the company. This date is crucial, so make sure to check the company's announcement for the exact deadline.

A diversified portfolio is key to minimizing volatility and maximizing return opportunity. This means spreading your money across different asset classes, such as stocks, bonds, and real estate, that react differently to various economic and financial environments.

A diversified portfolio is key to minimizing volatility and maximizing return opportunity. This means spreading your money out amongst different asset classes, such as stocks, bonds, and real estate.

A single stock, even a popular one like Amazon, shouldn't make up more than a small portion of your portfolio. For example, before Amazon's 2022 split, a single share would have constituted 55% of a $5,000 portfolio.

You don't have to wait for a stock split to happen to be able to afford investing in a popular stock. Some brokers, like SoFi Invest, Robinhood, and Webull, allow users to buy fractional shares.

A diversified portfolio should align with your overall investing goals. It's not just about buying into a pricey stock when it becomes cheaper, but about making sure it fits into your long-term plan.

Investing in a stock split can be tempting, but it's essential to remember that the value of the stock isn't changed by the split. The excitement over splits just isn't there for savvy investors today.

Some investors believe that a stock split is a bullish sign, but this could be speculating too much into the behavior of a board of directors. Firms often provide earnings guidance, a very direct comment from the firm.

A diversified portfolio means that your money is spread out amongst different asset classes, minimizing volatility while maximizing return opportunity. This is especially important when considering a stock split.

You don't have to wait for a stock split to happen to be able to afford investing in a popular stock. Some brokers allow users to buy fractional shares, or a fraction of a share, so you aren't forced to buy a whole share.

Investors should make sure that a stock aligns with their overall investing goals before buying into a split. You shouldn't jump all in just to say you own a certain stock, unless it's something that has long been a part of your portfolio objectives.

A stock split doesn't change the value of the stock, it's still the same underlying asset. The returns after a split may vary depending on market conditions, but the value immediately after a split is the same.

Stock splits can be a great way to make a company's stock more affordable and attractive to investors. For example, in 2014, Facebook split its stock 3:1, increasing the number of shares outstanding and reducing the price per share to $42.87 from $126.31.

Apple split its stock 7:1 in 2014, reducing the price per share from $93.32 to $32.97. This made it easier for new investors to buy into the company.

A 5:1 split by Google in 2004 also increased the liquidity of the stock and made it more accessible to a wider range of investors. The price per share dropped from $85.01 to $17.01.

Microsoft split its stock 2:1 in 2021, increasing the number of shares outstanding and reducing the price per share to $294.67 from $589.34. This made the stock more affordable for new investors.

A stock split increases the number of outstanding shares, and the share price adjusts in proportion to the change.

Stock splits don't affect the value of shares that you hold in a company, so you won't see a change in the money you've invested.

The reason for a stock split's short-term bullishness is still somewhat of a mystery, but it's often seen as a positive sign.

Only Amazon outperformed the S&P 500 three months after its stock split, but it also fell behind over the long term, according to the analysis.

Shopify had the worst results, with its share value dropping significantly, although this was part of a longer trend.

Changes in price that may look related to a stock split are often better attributed to longer-term or market trends, rather than the split itself.

Here are some key points to keep in mind:

Stock splits often use common ratios like 2:1, 3:2, and 3:1, according to FINRA. These ratios are widely accepted in the market.

Amazon split 20-for-1 in 2022, showing that companies can choose less common ratios. Apple split 4:1 in 2020 and 7:1 back in 2014, highlighting the variety of splits.

A 20-for-1 split, like Amazon's, is a significant change from the more common 2:1 or 3:1 ratios. This type of split can make a company's stock more accessible to individual investors.