Back in August of 2020 Tesla (TSLA) executed its first stock split of its common shares. The 5-1 split came after the stock had its biggest valuation as the stock price screamed passed 2000 dollars a share. When the split was announced it ripped even higher. Apple had also announced their 6-1 split around the same time, and again the surge after the announcement was on par. On August 31st. both companies split their stock respectively, though this was Apple’s Fifth such stock split in its history.
Stock splits are nothing new and there is no financial gain from the split alone. Although, it allows for more shares to hit the market and makes them cheaper to purchase. Institutional traders are able to get their hands on more for their clients’ cause would you rather have one share at 2000 or Ten shares at 200? This brings into play for options traders as well.
Take for example Berkshire Hathaway. The stock has never been split and the Oracle of Omaha (Warren Buffet) said he never will. One share of Berkshire currently trades at around $467,000. That takes most option and day traders out the game along with 99% of the world. Who has a half million just hanging around to play with?
Amazon (AMZN) just completed their 20-1 split this week and that stock split — which on June 6 gave 19 new shares to people who owned the stock before May 27, according to the Wall Street Journal — will probably entice retail investors and options traders to put new cash into Amazon stock. The reason? The lower stock price makes people feel that Amazon’s shares are more affordable even though that lower stock price reflects a 95% plunge in each new share’s ownership of the e-commerce giant’s equity.
There is plenty of research suggesting that stock splits boost shareholder returns in the short-term. The Journal noted that in the last 10 years, companies that split their stocks outperformed the S&P 500 three and six months thereafter, according to MKM Partners. To be sure, the effect is slight and it results from new retail money flow. Rocky White, a senior quantitative research analyst at Schaeffer’s Investment Research, found in a 2020 study that the average return for companies six months after a stock split was 5.3% — 0.9% above the S&P 500’s average gain. This March, Amazon’s board approved the stock split — the first one since 1999 — and shareholders voted for it in May. On June 6, the stock split went into effect and Amazon’s shares rose $2 to $124.79, according to the Journal.
