Along with Nvidia's outstanding earnings report earlier this month the company announced a 10-for-1 stock split. This can be great news for eager investors looking to add Nvidia to their portfolio, but what exactly is a stock split and how can that benefit current and prospective investors. Below is a brief primer on stock splits, and what they mean for potential investors, current investors and the companies themselves.
What Are Stock Splits?
Simply put, a stock split occurs when a company decides to split its current shares into more shares. This does not affect the total value of an investors' shares, it simply creates more of them. For instance, if one share at $100 was split into two shares, each share would be worth $50 - still equaling $100 total.
The Math Behind Stock Splits
Think about a pizza (stick with me here). Say you have a normal, large pepperoni pizza with eight slices. Each of these slices makes up a share of a company. If that company decides to do a stock split, that means that each slice of pizza will be further divided.
If two of those slices are yours and a 2-for-1 stock split is announced, those two slices will be split into 4 smaller total slices. The actual amount of pizza that’s yours has not changed, it’s simply been divided up even further. This allows less-hungry investors to grab a smaller slice of pizza, whereas before they’d have to take a whole slice if they wanted in on the pizza.
Stock splits can occur in a number of different ways. For example, common splits are 2-for-1, 3-for-1 and 3-for-2. While the math can feel complicated, the stock split ratios are fairly self-explanatory:
In the case of Nvidia's upcoming 10-for-1 stock split, for every one share you own before the split, you'll own 10 shares after the split.2-for-1: If you owned one share before the split, now you own two.
3-for-1: If you owned one share before the split, now you own three.
3-for-2: For every two shares you owned before the split, you now own three.
Who Benefits From Stock Splits?
New Investors
Stock splits can be an appealing investment option for those who typically have smaller capital to invest with. They make it possible for interested investors to buy stocks from popular companies whose stock values have skyrocketed over time. You may not have been able to invest in a company whose stock prices sit at around $600 per share, but when the stock is split and you can obtain a few at, say, $100 a share, that may become more doable.
Current Investors
The amount of shares you own will increase, but their worth will decrease proportionately, meaning a stock split will not affect the total value of your current holdings. For example, if you owned one share that was worth $200 and a 2-for-1 stock split occurs, you now own two shares worth $100 each for a total value of $200.
However, stock splits have the potential to be good news for current investors as it indicates the company is opening the door for new investors, meaning it could be a push that drives the stock prices up. This, of course, is not guaranteed, but the potential is there for current investors to get excited.
Publicly-Traded Companies
Of course, the company that decides to split their stocks has done so because they find it will likely be beneficial for their company. Here’s why:
As a company grows, releases new products, and continues to profit, its stock value rises. While this is good news for investors and the company alike, it’s possible that high stock prices begin to have a negative impact on the company’s market liquidity. Stock prices that grow too high become less-attainable for the everyday investor, meaning less people are choosing to invest in that company.
That’s why stock splits can be appealing for companies, because they allow more investors to buy shares at more affordable prices. Additionally, the announcement of a stock split can often cause excitement amongst new potential investors, drumming up interest and (potentially) boosting stock values.
Stock splits can be an exciting opportunity that makes pricey stock shares more attainable for the everyday investor. If you’re considering adding stock splits to your portfolio, make sure to check in with your investment advisor first. He or she can help you determine whether this may be a beneficial, long-term move toward your larger financial goals.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Digital assets and cryptocurrencies are highly volatile and could present an increased risk to an investors portfolio. The future of digital assets and cryptocurrencies is uncertain and highly speculative and should be considered only by investors willing and able to take on the risk and potentially endure substantial loss. Nothing in this content is to be considered advice to purchase or invest in digital assets or cryptocurrencies.
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