This Friday, July 15 2022, Alphabet, whose main subsidiaries are Google and Android, carried out a stock split (or share split). Previously, in 2022, Amazon and Shopify took the same step. For this reason, it is very important that every investor knows how a stock split works. In this article from Hapi, we will explain in the simplest way possible what a stock split is and what advantages and disadvantages it brings for investors.

What is a stock split and how does it work?

To begin, it's necessary to understand that all publicly traded companies on the stock market have a set number of shares in circulation. This means there is a fixed amount of shares available for investors in the stock market.

Knowing this, let’s learn in simple terms what a stock split is. A stock split occurs when a company, by decision of its board of directors, increases its total number of shares and distributes them among current investors.

Although the number of shares in circulation increases by a specific multiple, the total dollar value of all shares in circulation remains the same because a split does not fundamentally change the value of the company. This means that the stock split does not dilute current shareholders. There is no need to worry! The total value of your shares will not change.

Learn about a stock split with a simple everyday example

To understand this concept more easily, let’s think about a pizza. A stock split would be like cutting a pizza into more slices than originally available, without increasing the number of people sharing the pizza.

For example, think of a large pizza with 8 slices. Let’s say there are eight people who paid for that pizza. Initially, each person would receive one slice.

If a pizza split of 2-for-1 were carried out, each person would get 2 smaller slices. In this new distribution, there are 16 slices; however, since each person has 2 smaller slices, everyone still ends up with the same total amount of pizza they had at the start.

Why do companies apply a stock split?

When the price of a company’s shares rises to a level that may seem expensive for some investors, or is higher than the prices of similar companies in the same sector, the company’s board may decide to perform a stock split. Now, let’s look at the advantages of stock splits.

Advantages of stock splits for investors

• Appearance to investors: A stock split can make shares appear less expensive, even though the company’s fundamental value has not changed.
• Market liquidity: A stock split increases liquidity, making it easier for buyers and sellers to trade without major price changes. For these reasons, after a stock split, more small investors can participate as shareholders in the companies they are interested in.
• Possible increase in demand: The participation of more investors may lead to increased demand for a company’s shares, which could drive up the price of those shares.
• Confidence for investors: While the increase in demand may fade over time, stock splits by blue-chip companies often signal bullish sentiment to investors. Some see a stock split as a sign that the company is confident in its business growth prospects.

Other aspects to consider about a stock split

Not all the effects of a stock split benefit a company. The stock split process is costly because it requires significant legal oversight and must comply with regulatory laws.

While a stock split is not pointless, it does not increase a company’s fundamental value and therefore does not create additional value. Returning to the pizza analogy, if the pizza doesn’t taste good, it doesn’t matter whether it’s cut into 8 slices or 16.

Understanding more about Google’s stock split

A share of Google’s parent company, Alphabet, is now much more affordable for Wall Street traders after a massive stock split that took effect on Monday, July 18 2022.

Alphabet (GOOGL, GOOG) performed a 20-for-1 stock split, which lowered the price of a share from just over $2200 on Friday to around $110 on Monday. For a graphical representation, check out our Instagram post.

The stock split does not change Alphabet's market capitalization. The company is still worth nearly $1.5 trillion, keeping it among the most valuable companies on the planet.

Key takeaways from this article

In summary, a stock split offers certain benefits to new shareholders that every investor should know. First, the stock becomes more affordable for small investors. Second, it increases liquidity in the market, which may attract new investors and make managing investment portfolios easier.

However, every investor should conduct their own research before investing in a company that has performed a stock split. This article was written solely for informational purposes. We hope this concept is now clear so you can invest with confidence.

If you want to take advantage of the opportunities that appear daily on the US Stock Market, with no minimums and no commissions, open your account on Hapi now. Plus, on our app for investing in stocks and cryptocurrencies, you don’t have to wait for companies to do a stock split to buy their shares. Hapi offers fractional share purchases so you can always build your portfolio your way.