Stock Splits is dividing or multiplying a company’s outstanding shares without changing the company’s overall market value or capitalization. There are two types of stock splits, forward and reverse stock splits. The reverse stock split is the opposite in which a company decreases the number of its outstanding shares to increase the price proportionately without changing the company’s market value. Companies opt to reverse stock split when the share price is relatively low risking delisting, or the company is simply wanting to appear more valuable with the higher share price alluring a new targeted group of investors. While the more common split is the traditional or also known as the forward stock split which is dividing the stock price into more than one share. For example, if a stock price is $100, it is divided into two shares each worth $ 50. Companies choose to forward split stocks when their shares are relatively expensive so that they increase the liquidity of trading in the company’s shares. There is also a special split stock strategy called the “reverse/forward stock split” which refers to a reverse split that is followed by a forward stock split. Companies use it to remove shareholders who hold less than a specific number of shares and to increase the number of shares owned by the rest of the shareholders.
Stock Split reflects a bullish signal for investors reflecting the board of directors’ confidence, and a stock split usually denotes optimistic signals as a stock split has a positive statistically significant relationship with a stock return, according to several economic studies. Stock splits are commonly associated with an average performance since the 1980s of 7.8% during the first three months post the split compared to the S&P 500 average of 2.1%, 13.9% during the first half of the year compared to % 4.4 average of the S&P500, and around 25% during a year compared to an average of 9.1% for the S&P 500, according to a study by the Bank of America Research Investment Committee (BofA). The top 3 sectors with the best average performance after stock split announcement are the consumer discretionary sector with an average of around 26%, followed by the technology sector with an average above 15%, followed by the Health Care sector yielding an average return above 10%, according to a study by the BofA’s Research Investment Committee. However, not all splits are healthy. Some stocks have seen a negative return of 30% a year later.
To expect the performance of the stocks that split, we need to first look at historical shares’ performance. For example, Nvidia’s share was split several times with the latest a 4:1 split on the 20th of July 2021. The stock traded at $751.19 a day before the split and closing at $188.3 the day of the split, and in less than one year, the share price hit an all-time high of $345.91 despite the turbulence in the market. However, the share price plummeted later due to the global geopolitical tensions.
Source: TradingView (2022)
Several Market giants either announced a stock split throughout 2022. Tesla (TSLA) announced an intention to split, Amazon’s share (AMZN) underwent a 1:20 stock split last Monday rising 2% post the split after falling down by 10% since the announcement date in March. Alphabet’s share (GOOGL), as well, fell by around 17% since the announcement of a 1:20 in February as well as investors waiting to buy the shares at a lower price, as seen in the below graph. Another market giant going through a split is Shopify Inc. (SHOP) which announced a split of 1:10 taking place on June 29th. The split will cause a fall in the price by around 79% of about $35 from an average price of 1352.16 in 2021.
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