An attempt to stop the stock split posts
Since the Nvidia split and especially lately with the announcement of Alphabet, Amazon and Tesla the "Stock split - should I buy?" Posts multiply, a small post about it. For those who don't need this post - just read through the fun fact.
Short version: it's only a visual change. Nothing changes in the stock or the valuation. Comparable to when you go to the hairdresser - you change optically but remain the same person. You may get a little personality boost because you feel more comfortable. The equivalent of this is that the visually more favorable price often gives the stock a price boost. You can find out why in the text.
What is a stock split?
"With a stock split, the current stock of an AG is divided into a larger number of shares. This makes them visually more favorable. For the shareholder, nothing changes in his share in the AG, since his capital share is merely distributed over a larger number of shares after the split." [1]
Why is there a stock split every now and then?
For one thing, a company can increase the number of shares on the market without issuing new/more share certificates, since after the split, for example, 20 shares correspond to the value of one share before the split. Secondly, to make the share itself more attractive to private investors. Many are reluctant to buy only fractions of a share and thus do not have the opportunity to own a share that costs several 1000€. If they should do this nevertheless, they have partially a high cluster risk. If the price is (visually) lowered, many investors feel more comfortable with the stock in their portfolio. A possible reason why the price often gets a boost after a split - many private investors buy (after). This in turn is the reason why a stock split is very positively received on the stock market. Nothing really changes but everyone hopes for rising prices. See Tesla announcements a few days ago (+8% I think) [2].
It is also often mentioned that stock splits are a "signal of strength" for companies. Stock splits only make sense at an elevated price - means the company is signaling to the market "look our stock price was doing so well we need a stock split again to stay attractive." [3]
In my opinion, an important addition to @JohannesJaehn (should not be lost in the comments): "One might add, however, that a split is how a company achieves the requirements to be included in an index. This is particularly the case with Alphabet and Amazon, as they have never been able to be included in the Dow weighted by stock price due to their high price. However, the stock split means that they can now be included:
https://www.cnbc.com/2022/02/01/alphabet-stock-split-paves-way-for-addition-to-dow.html"
Disadvantages?
No disadvantages arise from the stock split because, as mentioned, nothing changes. The only disadvantages arise from the ignorance of a private investor. For example:
- Bottle conclusions due to the preliminary price drop on the day of the split.
- Visually cheaper price and therefore the danger of not recognizing an overvaluation [3].
Funfact
In case of a split, your share in the depot is not split, but withdrawn and replaced by new shares. In this way you receive X new shares. This is one of the reasons why in times of physical shares stock splits were rather rare. The effort to collect all shares and issue new ones was much too high. Due to the technical implementation, this is no longer a problem nowadays, as no action is required on our part. [3]
Conclusion
A stock split alone should never be the reason to buy, as the only change is purely visual. Of course, one can bet on the rising prices after a split. However, one should at least be aware that a stock split alone is not a promise of rising prices. An Nvidia, Amazon, Alphabet or Tesla deliver super numbers in recent years and are accordingly very popular in the market - popular = rising prices. Should anyway cheap, unpopular or strong dividend stocks do a stock split, it would very likely not cause such a price jump. Provided the dividend is also adjusted of course. You should also check your orders before/after the split. Often these are deleted and have to be reset. However, there are probably also cases where the order is adjusted but also cases where the order was simply executed due to the adjusted price.
End of the song - as a smart man said one thing: "Everything remains as it is!!!".
PS: please do not post the 2000th Tesla beef in the comments just because the words "Tesla", "price" and "cheap" are mentioned here, thank you.
[3] https://www.deltavalue.de/aktiensplit/
