Should you buy ahead of a stock split?
Don't buy just because of the split
If a company was a bad investment before a stock split, it would still be a bad investment. If it were a good investment before the split, it would still be a good investment, and now may be more affordable to some investors due to the reduced share price.
If a company you invest in announces a reverse stock split, you might wonder how to profit and if you should sell or buy more stocks. The split itself won't impact you, as your investment value will remain the same even if the individual stocks are worth more.
Stock splits are generally done when the stock price of a company has risen so high that it might become an impediment to new investors. Therefore, a split is often the result of growth or the prospects of future growth, and it's a positive signal.
A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not. Here are the key things to know about stock splits.
- Pro: Makes shares more affordable. ...
- Pro: May trigger renewed investor interest. ...
- Con: Could trigger volatility.
CHIPOTLE BOARD OF DIRECTORS APPROVES 50-FOR-1 STOCK SPLIT - Mar 19, 2024. NEWPORT BEACH, Calif., March 19, 2024 /PRNewswire/ -- Chipotle Mexican Grill, Inc. (NYSE: CMG) today announced that its Board of Directors approved a 50-for-one split of its common stock.
Disadvantages of a Stock Split
A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.
Many times reverse splits are viewed negatively, as they signal that a company's share price has declined significantly, possibly putting it at risk of being delisted. The higher-priced shares following the split may also be less attractive to certain retail investors who prefer stocks with lower sticker prices.
As previously noted, the reverse split itself doesn't result in any change in the value of an investor's position in a stock because the smaller number of post-split shares is offset by the proportionally higher per-share price. However, a reverse split can certainly change investor perception of the company.
Why do people like stock splits?
A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed. It can also increase the stock's liquidity. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split.
If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).
When you buy a stock after the split date, you will still receive the same proportional ownership in the company as you would have before the split. However, there are a few important things to consider: 1. Adjusted Price: After a stock split, the price per share is typically reduced proportionally.
Stock | Exchange | Ratio Denominator |
---|---|---|
ETAO | NASDAQ | 2024-03-19 |
FIXX | NASDAQ | 2024-03-20 |
FLYD | AMEX | 2024-03-15 |
INTZ | NASDAQ | 2024-03-18 |
It increases liquidity
Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter.
It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.
Amazon (NASDAQ: AMZN) has had four stock splits since its initial public offering in 1997, with its most recent one occurring in June 2022 in a 20-to-one split. The company has enjoyed immense success over the years by leading two crucial sectors: e-commerce and cloud computing.
Stock | 2024 performance through Feb. 29 |
---|---|
Digital World Acquisition Corp. (DWAC) | 135.2% |
Nature Wood Group Ltd. (NWGL) | 140.9% |
Sana Biotechnology Inc. (SANA) | 146.1% |
Super Micro Computer Inc. (SMCI) | 204.7% |
The total value of the company remains the same after a split, as it simply divides existing shares into more shares with a lower price per share.
With stock indexes at all-time highs, it seems we are in the midst of a new bull market. While much of the market's recent gains have come from a handful of stocks, the rally has begun to broaden in recent months. Expectations of an earnings rebound in 2024 suggest earnings could continue to drive the market higher.
Why would a company not want to do a stock split?
In some cases, stock splits can have a negative effect. Smaller companies who split their stocks may have stock prices fall too low.
Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.
Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.
Reverse splits also can diminish or force out small investors, who may not have enough shares to be consolidated. For example, if a company decided on a 1-for-50 reverse split, any holders of fewer than 50 shares wouldn't be offered a fractional new share. They would instead be paid cash for their shares.
Regular and reverse stock splits do not change the value of one's position, only the number or shares outstanding. They do not trigger short squeezes. To the extent that they might, I would suggest that reverse-splits are a way for a very weak stock to push its price up so that the stock doesn't get delisted.
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