A stock split is similar to cutting your chocolate into four pieces only because you can’t eat eight. Your chocolate remains the same regardless of whether it’s four pieces or six. This is how a stock split works. When a company breaks each share into several new shares and it does not affect its market capitalization or your position in the company, it is known as a stock split. Many investors wonder whether stock splits are bad for investors. In simple words, no, stock splits are not bad for investors.
Stock splits are a good move for present and future shareholders. They’re also a sign of progress for a company.
There have been a few stock split announcements recently, including splits in Amazon (NASDAQ:AMZN) and GameStop (NYSE:GME) shares. Even Tesla (NASDAQ:TSLA) has requested shareholders to approve a stock split and we might get to hear about it soon.
With that in mind, let’s take a closer look at whether stock splits are bad for investors.
Stock Splits Change Nothing
If you look at the bigger picture, stock splits don’t change anything for investors. They just make shares easier to purchase. It is mostly regarded as a good thing for investors and it eventually boils down to the price of shares.
If a share is trading at $50, more investors will be able to afford it compared to a share that is trading at $3,000. Due to the high prices, most investors cannot buy stocks and a stock split can change it. If you hold 1% in the company, you will continue to hold the same once the stock splits.
Stock splits are good for investors as they provide them with opportunities to get ownership in companies they have been eyeing for a long time. With a drop in stock price, investors will be able to buy shares that were once out of reach. It decreases the value of every share and increases the number of shares outstanding. Whenever the share price rises, invetors enjoy higher returns.
As mentioned earlier, a stock split is also a sign that a company is growing. If you already own the stock, there will be a small impact on your holding. You now hold more shares, however, each share will show a smaller percentage of holding in the company. But you may notice a boost in the stock price after a split since it becomes more affordable and there will be more interest in the stock.
What Should Investors Do?
Investing in a stock after the stock split is a good move. The per-share value is lower and you can invest in more shares. As an example, without the Amazon stock split, AMZN would be trading at $2,447 today but it is currently trading for $125, making it accessible for everyone. If you want to invest in a company, making the move post stock split is a good time to do so.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.