On Friday, Amazon stock closed at $2,447 a share. On Monday the stock closed at almost $125 a share. On paper that shakes out to over a 5000% decline.
But Amazon shareholders actually didn’t lose a penny on Monday. In fact, if they bought shares of Amazon on Friday and sold it on Monday, they would have come out ahead – short-term capital gains tax aside – since the stock closed higher.
That’s because the company executed what’s known as a stock split for the first time in 23 years. A stock split means a single share gets split into multiple shares. Typically companies do 2-for-1 or 3-for-1 stock splits where shareholders get an extra one or two shares equal to the previous trading price of one share.
But Amazon executed a 20-for-1 split. Here’s what that means and why it could be lucrative for shareholders.
What is a 20-for-1 stock split?
A 20-for-1 split means that Amazon shareholders got 19 additional shares for every one they owned before Monday. Since Amazon shares closed at $2447 on Friday, before markets opened on Monday the price of shares after the split went to around $122, or $2447 divided by 20.
Google’s parent company, Alphabet, is planning a 20-to-1 stock place that will take effect on July 15.
Amazon’s market value didn’t change as a result of the split because share prices decreased at a proportional rate to the number of shares that were made available.
Amazon said the split makes the stock “more accessible for anyone who wants to invest in Amazon” and gives employees “more flexibility in how they manage their equity in Amazon.”
Do you lose money when a stock splits
Just like Amazon’s market value doesn’t change, shareholders don’t lose any money because of a stock split.
Is a stock split good
Generally speaking, stock splits are a good sign because they mean that a company has done so well over time that the price of a single share is too expensive for an average retail investor.
Should you buy before or after a stock split
Theoretically, stock splits by themselves shouldn’t influence share prices after they take effect since they’re essentially just cosmetic changes.
But Bank of America research analysts found that since 1980 S&P 500 companies that announced stock splits “significantly outperformed the index 3, 6, and 12 months after the initial announcement.” Over 12 months, stocks that announced splits gained an average of 25% compared to a 9% gain in the S&P 500.
Their research seems to suggest that it’s better to buy a stock before it splits so you can have skin in the game before it shoots higher.
But it’s important to keep in mind that “some of the outperformance is likely due to momentum,” the analysts wrote in a research note published after Amazon announced its split on March 9.
“Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.” Ultimately, a company’s underlying strength is what drives the direction of a stock, they wrote.
That said since Amazon made the split announcement its stock is down more than 11% as of June 6. But this comes as tech stocks have been facing a widespread selloff as consumers cut back on spending due to inflation and recession fears are mounting. In past recessions, tech stocks have underperformed relative to other sectors like consumer staples and health care.
Upcoming stock splits
- Dexcom’s 4-for-1 stock split is set to take effect on June 10
- Shopify’s 10-for-1 stock split is set to take effect on June 28
- Google’s 20-for-1 stock split is set to take effect on July 15
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