If you follow business or investing news, you may have recently heard about Amazon completing a 20-for-1 stock split. But what does this actually mean for both existing and potential Amazon shareholders?
Stock splits can seem complicated at first glance. However, understanding the reasoning and mechanics behind them is key for any informed investor.
In this comprehensive guide, we’ll explore stock splits using Amazon’s historic one as a timely example. You’ll learn:
- What a stock split is and how the process works
- Why major companies like Amazon split their stocks
- An overview of Amazon’s history with stock splits
- What Amazon’s recent 20:1 split means for existing shareholders
- How the lower per-share price unlocks opportunities for smaller retail investors
- And more…
Let’s dive in!
What is a Stock Split? A Slice of Pizza Analogy
To understand stock splits, visualize slicing up a pizza. You start with one whole pizza representing 100% of the company. Cutting it into more slices doesn’t change the total size. However, each individual slice now accounts for less of the overall pizza.
Similarly, in a stock split, a company distributes more shares to existing shareholders. This divides ownership of the company into smaller chunks per share, but the overall value stays the same.
For example, let’s say a company undergoes a 2-for-1 stock split. For every old share owned pre-split, investors now get:
- 2 shares (double the previous number)
- Each representing half underlying ownership
- So the total value of holdings is unchanged
It simply takes the existing pizza and slices it into smaller shares. Theoretically, more affordable and tradable shares attract more interest from smaller investors, increasing liquidity.
Why Do Companies Like Amazon Split Stocks?
There are a few key reasons companies may initiate stock splits:
Lower Per-Share Price: A high absolute share price looks impressive but can deter smaller investors from buying even one share. For example, before splitting, Amazon closed near $2,800 per share – too expensive for casual investing. Splits divide this into something like $100 per share (using a 20:1 split for illustration).
Increase Accessibility: Dividing shares into bite-sized chunks attracts more small retail traders and unlocks fractional share purchasing. These mechanisms all improve accessibility for regular investors.
Renew Investor Interest: Splits refocus public interest onto the company. The media hype as shares trade into new lows helps attract eyes to the stock. It renews retail confidence to buy dips amid market uncertainty this year.
Employee Stock Grants: Awarding full pre-split Amazon shares worth thousands to employees is impractical. Slicing stock grants into cheaper chunks streamlines compensation programs tied to share ownership.
Now let’s look at Amazon’s history of conducting stock splits…
Overview of Amazon’s 4 Stock Splits
Since its 1997 IPO, Amazon has split its stock 4 times:
| Split Date | Split Details | Share Price Before | Share Price After |
|---|---|---|---|
| June 2, 1998 | 2-for-1 | $95.06 | $48.84 |
| January 5, 1999 | 3-for-1 | $242.75 | $85.34 |
| September 2, 1999 | 2-for-1 | $106.69 | $54.31 |
| June 6, 2022 | 20-for-1 | $2,785.58 | $125.25 |
On June 6th, 2022, Amazon enacted its largest split ever at a whopping 20 shares distributed for every 1 owned.
Right before the split, shares closed near all-time highs at $2,785 on June 3rd. On June 6th, the stock opened at $125.25 per share (1/20th pricing).
What Amazon’s 20:1 Stock Split Means for You
Now for the million dollar question – what do stock splits mean for both existing and prospective AMZN shareholders?
Little Impact on Existing Long-Term Shareholders
For existing long-term buy-and-hold shareholders, stock splits have minimal short or long-term effects. While their absolute number of shares increases 20 fold, ownership percentage of Amazon and their total market value remains unchanged pre-split to post-split.
Beyond the hype-driven price pop when announced, over the long run, total portfolio values move in line with Amazon’s fundamentals more so than the split itself.
However, from a psychology standpoint, the lower nominal share price increases perceived affordability. And the torrent of media coverage draws renewed investor attention onto Amazon’s prospects.
So in a way, splits theoretically reinvigorate public sentiment and interest towards buying Amazon stock.
Opens the Floodgates for Small Retail Investors
The greatest implications are for regular retail investors and small scale traders previously boxed out from buying Amazon stock.
Before the split, single shares cost over $2,700. That prices out everyday investors unwilling or unable to risk thousands per share.
Post-split, Amazon trades around $125 per share – now much more accessible for smaller investment portfolios. Investors can also purchase fractional shares on platforms like Robinhood.
This enables regular people to invest nominal amounts into Amazon. With fractional trading, investing just $25 buys 0.2 shares exposes you to Amazon’s upside. Democratizing access allows anyone to tap into the company‘s dominant position.
Lowering barriers unlocks exponentially higher retail demand. And higher demand generally increases prices over time. So increased ownership by masses of small investors may continue propelling Amazon‘s share price higher. The viral marketing splash from splits certainly don‘t hurt either!
Key Takeaways: Amazon Stock Splits and You
Here are the key points for investors to remember about Amazon’s historic 20:1 stock split:
- Stock splits simply divide shares into smaller slices without changing company value or ownership percentages
- Amazon split its stock 4 times historically – but its 2022 split of 20 more shares per 1 owned was the largest ever
- For existing shareholders, splits have minimal long-term impact on total portfolio value
- But the lower share price opens investing access for smaller retail traders previously shut out
- This democratization of ownership can catalyze a whole new wave of exponential demand for Amazon stock
So while seemingly innocuous, this event allows individual investors to tap into Amazon’s dominant market positioning. Their incremental buying en masse may continue driving share prices higher.
FAQs About Stock Splits
Here are answers to some frequently asked questions about stock splits:
What is a stock split?
A stock split increases the number of shares in a company by dividing each existing share into more chunks. The market cap stays equal, but the share price is adjusted lower.
Why do stocks split?
Splits make stocks appear more affordable and accessible for small retail investors to encourage higher ownership and liquidity. Renewed investor interest also helps share prices rise.
Do stock splits change my ownership percentage?
No – while you own more actual shares, as a percentage of the overall company, your ownership remains unchanged.
Do shareholder have to do anything during splits?
Existing shareholders don’t need to do anything – additional shares are automatically deposited after market close on the record date.
Are stock splits good or bad?
Splits are usually positive signals reflecting strong past growth and confidence future demand will further increase prices post-split. CFOs would not voluntarily diminish prices without expectations share counts will rise higher long-term.
Conclusion
Amazon’s 20 for 1 stock split marked a historic event for the ecommerce juggernaut. While largely a cosmetic change, the dramatically lower share price unlocks Amazon’s upside for masses of new investors previously boxed out.
This guide dived into splits from first principles and used Amazon’s momentous one as a timely example. We explored what splits are, why companies conduct them, examined Amazon’s history, and explained what this all means for shareholders.
Now you have in-depth knowledge into stock split mechanics and impacts. So next time headline buzz flares up around a hot stock splitting, you’ll know exactly what it means and how to react!
