What are stock splits? Why are they done?
Last month, Shopify announced plans for a 10-for-1 stock split. This after many other recent stock splits among some of the largest tech companies, like Amazon, Alphabet, and Tesla.
What’s going on? What’s a stock split, anyway?
A stock split is a pretty simple concept. Let’s say a company had issued 100,000 shares of stock at $10 per share. That’s a total valuation of $1 million. If it were to do a 10-to-1 split, the number of shares would increase to 1 million. And each of the shares would be worth $1. The total capitalization of the company would not change. But the price of an individual share would get a lot cheaper.
The most common reason for a stock split is to encourage more buying of the stock in the hopes that it will lead to higher prices. A famous example of this occurred in 2010 when Berkshire Hathaway issued a 50-to-1 split for its Class B shares. It increased the amount of trading on the stock tremendously and allowed those B shares to be bought and sold on the S&P 500.
So, in theory, stock splits shouldn’t have any impact on price movement. But in practice, they do. Not always much. (The average, I think, is a spike of about 2.5%.) And not always for long. But they can make a difference.
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