Welcome to my latest Ted talk!
It seems with the latest high profile stock split ($AMZN 20-1 split), there are a lot of misconceptions being thrown around. The majority of this post was first written back when $AAPL had their 4-1 split in August of 2020. Much of the information is relevant to this day and will hopefully clear up common misconceptions around stocks splits.
First off, what happens when a company splits their stock?
In the case of $AMZN, the stock is splitting 20-1. Today, Jun 6, the shares began trading on a split-adjusted basis. Pre-split, the per-price share was roughly $2,450, today, after accounting for the 20-1 split, each share opened for trading at roughly $122. The number of shares in circulation as a result increased by 20x. This means the companies valuation has not changed.
What about my options contract?
The vast majority of time with a conventional split like what we have sees with $AMZN, options contracts will be adjusted similar to conventional stock ownership. If you own 1 2500c contract, post-split you’ll own 20 125c options. While I don’t expect this outcome, it is also possible for a non-standard options contract instead. Non-standard contracts are common with reverse splits, not very common with this sort of split.
What about dividends?
While not applicable to $AMZN, the dividend yield is expressed as a percentage. 1% (rounding up) will be same regardless if you own 1 share at $400 or 4 shares at $100.
Should you buy before the stock split or after?
While a stock may see increased volatility post-split, investing in a company should be done when you as the investor feel the stock is undervalued. This may be pre-split or post-split based on price action. If you are actively trading you may be able to take a speculative position pre-split with the assumption that post-split there will be increased interest in the stock and thus an increase in share price. There is no guarantee we’ll experience a post-split rally though.
Bottom Line
Fundamentally nothing changes with a stock pick. When companies execute stock splits they’re simply reducing the cost and thus the barrier to entry for small time investors.
Thank you for attending my latest Ted Talk.
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