It’s a stock-split frenzy, and Amazon is getting in on the action. They are the latest in a series of big names to implement or announce a stock split, dramatically increasing the number of shares available to investors. Alongside Amazon, 2022 is also expected to see stock splits from Alphabet, Shopify, Tesla, Nintendo and the ubiquitous GameStop.

But this is not a recent phenomenon. Many public companies have implemented stock splits over the years, including Warren Buffet’s Berkshire Hathaway class of stock in 2010 and Apple, which has split five times since its IPO in 1980.

Amazon first announced the plan to complete the stock split in March, offering existing shareholders an additional 19 shares for each one they hold in a 20-1 split. The split ratio that each of these companies offers to shareholders is different, but with so many billion dollar companies looking to achieve a stock split, there has to be something.

Download Q.ai for iOS for more investment content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay any fees or commissions.

How does a stock split work?

Any shareholder holding Amazon stock on May 27 will receive an additional 19 shares for each share held during the stock split on June 3. It will not cost existing shareholders anything and the value of their holdings will not change as a result of the split.

So, if the current Amazon stock price is around $2,500, a shareholder holding three shares will see a change on their statement or app a few days after the split date. Their overall investment will still be around $7,500 (assuming the market doesn’t crash or skyrocket), but rather than having three stocks, they’ll have 60.

The only difference is that the price of each of these stocks will drop significantly. In this example, the stock price would drop from $2,500 to $125. For many investors, that’s it. A slightly different number on an app and the hope that the split will boost the stock price (we’ll get to that in a minute).

Download Q.ai for iOS for more investment content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay any fees or commissions.

Why split stocks?

So far, a stock split seems a bit pointless, right? A different set of numbers on a statement, but the company still does everything the same way as before, the market capitalization (company valuation) does not change, and the value of the shareholder’s shares remains the same. So why do it?

There are many reasons, and most of them come down to investor psychology. As the stock price rises, it can start to seem unaffordable. A stock price of $1 means your $2,500 can buy thousands of stock units. A stock price of $2,500 means you can buy 1. The human mind is a weird and wonderful thing, and for some reason we may perceive expensive stocks as worth less, even if the market capitalization of every company is the same.

This problem goes beyond the perception of investors with smaller portfolios. For those with $10,000 to invest, buying Amazon stock at its current price would mean almost 25% of the total portfolio would be invested in a single company. That’s a lot of concentration, and most professional investment managers would say that’s a pretty bad idea from a diversification standpoint.

At a stock price of $125, one unit of Amazon stock would mean that investors would only have 1.25% of their portfolio exposed to the company, leaving much more room for diversification.

This also contributes to the liquidity of the stock. Smaller pieces can be sold by investors, and Amazon itself said in its filing that the move would make it easier for its employees to manage their Amazon holdings. Previously, if they wanted to get their hands on $1,000 in cash, they had to sell a whole share and then reinvest the rest. After the stock split, they will be able to sell a few units and get pretty close to the $1,000 they need.

Let’s be honest though, Jeff Bezos and his board aren’t making this decision just to help the little guy who wants to go on a summer vacation. All of the above reasons are true, but it matters to existing shareholders because of the potential for Amazon stock price to rise. With a more affordable entry point, more investors will potentially look to get into the action, which could increase demand and, therefore, increase the price.

Why split the stock now?

There’s an added benefit for Amazon to do this now. It’s no secret that the US tech sector is bleeding pretty badly so far in 2022. Amazon itself has seen its stock price plummet nearly 30% at the time of writing. The stock values ​​of Apple, Netflix, Meta and Microsoft all took similar hits.

For investors with even a passing interest in the market and Amazon’s stock price, it’s pretty clear that it’s been a tough year for a company whose stock price has hovered around $3,250. for most of 2021. A stock split can reset that perception.

With a new stock price of, say, $125, this association of context and price is lost. Of course, it wouldn’t take much research to figure out what happened, and the charts are adjusted to reflect new actions, but again, it’s all about perception.

Previous Amazon stock splits

This will be the fourth time Amazon has split its stock. For some strange reason, in the late 90s they were a bit obsessed with trying to keep the stock price around $100. Considering how quickly the price rose during the dot-com bubble, this meant that they split the shares in June 1998, January 1999 and again in September 1999. Shortly after, the dot-com bubble burst and management from Amazon didn’t have to worry. that the stock price is now too high, with it crashing below $6.

So we can’t learn much from the past when it comes to previous Amazon stock splits, but we can look at the performance of other companies when they’ve done the same thing. The stock split shouldn’t really change anything, as the fundamentals of the business will remain exactly the same. That said, since 1980, companies that have split their stocks have outperformed the S&P 500 by 16.3% over the following 12 months.

Now, that’s a great example of correlation not necessarily implying causation. Realistically, the stock split is certainly not what made this average performance so much better than the market. Companies that do stock splits have typically seen a nice rise in their stock price, which is often a big factor in deciding to split in the first place. This usually means they are doing well as a company and were probably already outperforming the S&P 500 before the split.

What we do know is that so far the news has been very positive for the Amazon stock price. As of market close on Wednesday, June 1, Amazon is trading at $2,433.68, a gain of 17.22% over the past 5 days.

What this means for investors

So far, you might be reading this article thinking we missed something. The world has changed dramatically since Amazon’s first stock split in 1998, and these days you don’t have to buy a full stake in a company. Many trading and investing apps will now allow you to buy fractions of a full stock.

It’s true, and exposure to a company using fractional shares can be a great way to gain access to investments you might not otherwise be able to afford. However, it’s important to remember that this is only possible due to a bunch of technical fixes going on behind the scenes in your investing app or trading platform.

Typically, the app or platform will match you with a group of other investors and trade together. So if you have $1,250 to buy 50% of an Amazon stock, they’ll find another investor who wants to do the same, buy the stock, and then give you half of it.

This means that there are often quite a few restrictions with fractional shares. For example, brokers only want to do this for large, highly rated companies. This way they can always be sure to find a match for fractional transactions. Transferring these fractional holdings to another broker will also often be tricky. This could mean you have to sell them and then buy them back, which could have tax consequences or mean you are exposing yourself to a period of market inactivity.

It also means you are less likely to have the same shareholder rights, such as being able to vote on company decisions. This probably isn’t a big deal for most investors, but it can be important if you want a say in new initiatives such as the company’s adoption of sustainable business practices.

Realistically though, if you’re relying on fractional stock and stock splits to keep your portfolio well-organized and sufficiently diversified, there are better options.

Q.ai is a great example, and with our Emerging Tech Kit, we’re using AI to identify smart investment opportunities in the sector which can include Amazon, Tesla and Alphabet. This allows you to invest in the best of the tech industry, without having to worry about individual stock prices.

To learn more about this and other investment kits we offer, check out our Learning Center.

Download Q.ai for iOS for more investment content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay any fees or commissions.