What is a Stock Split?

If you wanted to buy one share of Amazon stock today, it would cost you about $150. But, if you went all the way back to 2010… it would still cost you about $150.

One of the more confusing aspects of investing in individual stocks is factoring in the impact of a stock split. In this example, the reason Amazon stock is still the same price it was 12 years ago is because 1 share of Amazon stock became 20 shares of Amazon stock following a 2022 stock split.

We can think of a stock split like cutting a pizza. You’re not creating more pizza by cutting it, just dividing it into smaller slices. In the same way, a stock split increases the number of outstanding shares a company has, proportionally lowering the price of each individual share. In other words, before the split you had 1 big slice of Amazon worth $3,000; after the split, you had 20 slices worth $150.

But why would a company choose to do this? There are a few reasons:

Make the stock more accessible – A high share price can be intimidating for smaller investors. A split makes the stock more affordable, potentially attracting a wider pool of buyers and boosting trading volume.
Increase liquidity – More shares circulating means the stock is easier to buy and sell, which can make it more volatile in the short term, but generally leads to a smoother trading experience.
Psychological boost – A lower share price can make the stock appear more attractive to investors, even though the total value of their holdings remains unchanged.

So now that we know all about stock splits and why a company might choose to do one, what about the opposite – would a company ever do a reverse stock split? Yes! But for different reasons.

While a stock split increases the number of shares and lowers the price, a reverse split reduces the total number of shares and raises the price. Some reasons that a company might consider a reverse stock include:

Getting listed on an exchange – Some investment exchanges have minimum share price thresholds for listing (for example: NASDAQ requires a minimum price of $5 per share). A reverse split can also help a company avoid getting kicked off an exchange for having a share price that is trading too low.
Attract institutional investors – Many funds have restrictions on investing in stocks below a certain price point. A higher share price can open the door to these investors.
Improve market perception – While a reverse split doesn’t change a company’s underlying value, a higher share price can be seen as a sign of stability and attract broader investor interest.

So, what does a stock split (or reverse split) mean for you? The good news is, not much! Your proportionate ownership of the company remains the same, even though you might end up with many more (or many fewer) shares. So, if you ever wake up to find your Amazon stock trading at $10 per share, remember to stay calm and check for a stock split!

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