In most cases, stock splits are undertaken by companies when the share price has gone up significantly, particularly in relation to a company’s stock market peers. The smaller the dollar amount of each share, the smaller number of shares are needed by even the smallest investor to buy or sell that stock.
Liquidity means the ease with which investors can buy or sell shares on a stock exchange. Why do companies announce stock splits? Stock splits are a way for companies to increase their overall liquidity. Sticking with the dark chocolate bar analogy, after breaking the bar into smaller bits, you have smaller bits of dark chocolate, not more chocolate overall. The fundamentals of the company and the stock price have not changed. This does not mean that the stock has become cheaper. In this example of a 2-for-1 split, if you had one share of Company X at $10 per share, you now have two shares of Company X at $5 per share. For example, if a company board announces a 2-for-1 split, then you get one extra share for each share you own - but the share price will be halved. Similarly, in a stock split, it is very important to remember that the price of the share also is reduced. You still have the same amount of chocolate, just in smaller segments. Your one big dark chocolate bar is broken down into multiple bite-size pieces.
Think about it like a dark chocolate bar. The value of your holdings is the same, just in smaller chunks. One share gets divided, or split, into multiple shares. Simply put, a stock split is exactly what it sounds like. And, Apple ( AAPL) split its stocks in 2020. Back in July 2021, Nvidia ( NVDA) had a 4-1 split. Moreover, Alphabet ( GOOGL), the parent company of Google, announced plans for a 20-1 stock split in February. The upcoming 20-1 stock split is set to take effect on June 6, meaning that for each share of Amazon you own, you would get an additional 19 shares. Earlier this month, ( AMZN) announced plans for its fourth stock split since 1998. The announcement follows a raft of stock split announcements.
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