Why did Amazon Split their Stock 20:1
The art of the stock split.
Good morning everybody
As of yesterday, Amazon.com’s stock price has been cut by 1/20th, and many people who aren’t savvy in the investing world are confused about what this means.
Is it a better deal?
Did they drop on bad news?
Why would they want to split their stock in the first place?
Today, we will go over what a stock split is and why a company would want to do it in the first place.
What is a Stock Split?
There are two types of stock splits:
Reverse and forward.
Forward is the one most people are familiar with, typically for a good reason.
A stock split is when a company’s board of directors authorizes more shares to its shareholders without diluting the price—effectively raising the total share count and lowering the individual share price. That is the case, at least for forward stock splits.
A reverse stock split is essentially the exact opposite. For example, if you owned 100 shares of a company and they announced a 2:1 reverse split. You would end up with 50 shares but still valued the same as before the split.
Think of it as the total share being one big pie, and a stock split is just another way to slice it.
Below is a visual representation from Robinhood.com
Why do Companies Split Their Stock?
There are several reasons why a company will choose to split its stock. (note: a stock split has to be approved by the board of directors)
The reasoning depends on whether it is forward or reverse.
If a company issues a reverse stock split, the reason is more often than not because the stock is too cheap, and they want to give their share price the appearance of value. (Not always, but that seems to be the general rule of thumb.)
But in the case of Amazon’s forward 20:1 split, there are a couple not so apparent reasons.
Amazon said that they chose to split the stock from over $2,500/share to only $122 as of Monday to give their employees and smaller investors more options when managing their holdings.
For the most part, this is true and will help people who previously didn’t want to shell out $2,500 for a singular share but still want to own a piece of the company. (yes, I know you can buy fractional shares, but I don’t know many people who actually do this)
Another reason that isn’t so obvious is Amazon is trying to sneak there way into the Dow Jones Industrial Average. (An index that is weighted by the share price of the 30 largest industrial companies)
They would want to be a part of this because they would most likely get a significant influx of new investors because the majority of retail investors are buying and holding indexes like the DOW. But they haven’t been invited to join before because the Index is weighted by share price, giving cheaper stocks less sway and vice versa.
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As always, have a great day, and remember to live in the moment.
(dealing with numbers all day can be especially draining)
