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What Is a Stock Split?

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Is 2022 the year of the stock split for big tech? 

Big names including Shopify  (SHOP) - , Amazon  (AMZN) - , Tesla  (TSLA) - , Alphabet  (GOOGL) - , and GameStop  (GME) -  have announced stock splits.

After executing a 20-for-1 stock split Friday, Amazon is trading at higher to open its first day of trading at its new level. 

So why did Amazon split its stock, what do stock splits actually accomplish and are they still relevant in the age of ETFs and fractional shares? 

FULL VIDEO TRANSCRIPT BELOW:

What is a stock split and why do companies do it?

In simple terms, a stock split is breaking a company’s existing shares into multiple new shares but keeping the overall share price the same. 

There are no set guidelines for how frequently a stock split can happen. Traditionally, they have been used to create value for shareholders, though the exact use of a split varies case by case.  

A company's board of directors will decide to do a stock split and then notify the SEC a minimum of 10 days before the split. 

It essentially works this way: 

This is a company with a stock price of $50 each. 

Then they decide to do a 5-for-1 stock split. 

This means there will be five slices worth $10 each.

But the overall price is still $50.

In March 2022, Amazon announced a 20–for-1 stock split and the tech giant is no stranger to splits.

During the dotcom bubble, Amazon split its stock three times. 

But investors have other options…

There are fractional shares, which as the term suggests, is buying only a part of a whole share.

Also, there are of course ETFs, index funds, etc., which are basically a basket of stocks and bonds.

So then, why does a stock split matter from a company's perspective?

Some argue stock splits can increase liquidity by allowing smaller shares to be bought, sold, and converted to cash more easily.

Additionally, a stock split often signals the prosperity of the company.

A stock split could get the company included in major indices and this will have a direct impact on ETFs, mutual funds and other investor funds. 

For example, in 2014 Apple performed a 7-to-1 stock split, dropping the stock price to $90 from $650, helping it to secure a spot on the Dow Jones Industrial Average.

Just because a company’s stock price is high, doesn’t mean they need to perform a stock split. 

Legendary investor Warren Buffett’s Berkshire Hathaway is the perfect example. 

Despite Berkshire’s 6-figure stock price, Buffett is firmly against stock splits. Buffet believes the high price attracts investors interested in long-term growth.

However, that doesn’t hold true for Berkshire Hathaway’s Class B shares. In Jan. 2010, the Class B shares did a 50-to-1 split share.

A stock split doesn't fundamentally change the value, but it could be an essential step to draw in more investors. 

Plus, the announcement of a stock split often creates news or makes headlines, upping a company's exposure.

This abundance of options has left many wondering if the stock splits still have the same impact in modern investing. 

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