Wall Street’s “stock split” boom is back: is it a simple “belief game”, or is it a prelude to a surge in stock prices?

Chinese investors may be familiar with stock splits.

The so-called “stock split” is also known as “split”. When a stock’s share price reaches a certain height, it may “dissuade” investors, thereby affecting the trading volume of the stock. Therefore, the company may consider stock splits. In the future, shareholders’ equity will not change, nor will the company’s total market value. The difference is that because the stock price becomes cheaper, it will attract more investors to buy the stock, increasing trading volume and liquidity.

Generally speaking, stock splits are a popular move for investors. Although a pie is divided into 8 pieces or 4 pieces, there is no logical difference, but this is the performance of the listed company’s confidence in its own finances. Therefore, after the company announced In the initial stages of a stock split, the company’s share price tends to rise.

Dow Jones data shows that in the past ten years, the US stock market has an average of 20 companies for stock splits every year, and the peak of stock splits was during the Internet bubble in the 1990s. During the period from 1997 to 2000, the average annual stock split 65 companies carried out stock splits, and in the years before the 2008 financial crisis, the frequency of US stock splits also increased significantly.

This summer, Wall Street once again ushered in an intense stock split.

The global e-commerce giant Amazon announced on March 9 this year that it will split its shares at 1:20, and next Monday will be the first trading day after the split.

Amazon’s stock price was briefly boosted by news of the stock split, but the pressure on demand in the post-pandemic e-commerce industry has been weighing on the company’s stock price. As a result, Amazon’s stock has actually fallen by around 12% since the announcement of the stock split.

In addition to Amazon, Google’s parent company Alphabet has also announced a 1:20 stock split that will take effect in mid-July. Similarly, Game Station also asked its shareholders to expand the stock issuance authorization to realize the stock split, and Tesla also announced that it will conduct the second stock split in recent years, but the two companies have not released any information related to the stock split so far. Including time and scale, etc. Previously, Apple had just completed a 1:4 stock split. In the follow-up, investors are also concerned about whether high-priced stocks including Booking Holdings Inc, Broadcom, and ASML will conduct stock splits.

The intensive stock splits of U.S. stock companies have attracted the attention of Wall Street participants. In addition to the stock split news of major companies, let’s take a look at the impact on stock indexes and individual stocks.

On the one hand, market participants believe that stock splits have little impact on stock indexes and individual stocks.

A rational investor might argue that a stock split shouldn’t have any fundamental effect other than increasing the number of shares. In essence, the rise of a company’s stock price should be due to investors’ optimism about its future market outlook, rather than a stock split.

Wells Fargo strategist Christopher Harvey pointed out, “As far as the stock split itself is concerned, it can neither create nor destroy any value. After the split, the stock usually has a positive upward momentum, and that is because the company itself is in good condition and basically Excellent face.” Therefore, in the company’s stock split, the focus of investors’ attention is actually the company itself, not the action, and there should be a correlation between the two, not a causal relationship.

Moreover, although the stock split itself is the company’s hope to lower the stock price to attract more investors, this logic has also failed over the years, because most US stock brokerages have allowed investors to buy only a small part of the company’s stock, that is, Investors can easily buy one 2,000th of a $2,000/share stock for $1. In theory, investors can buy thousands of stocks for $1. Data from a U.S. stock brokerage showed that 2.3 million accounts on its platform used this purchase method last year. In addition, countless ETFs in the U.S. stock market can also help investors hold a basket of high-priced stocks at a lower price.

However, some market participants believe that stock splits can indeed benefit individual stocks and the market.

According to Bank of America data, since 1980, stocks in the S&P 500 that announced stock splits have outperformed the index by an average of 16 percentage points in the ensuing 12 months. In the past few years, the companies that have split stocks have been dominated by big tech companies, including Apple, Nvidia and Tesla, all of which have seen their share prices soar, as well as some lesser-known companies, including Sherwin-Williams & Co. , Amphenol Corp, McCormick, etc.

Also, options change hands in units of 100 shares, so options contracts on high-priced stocks are more expensive. In the past two years, the number of retail investors in U.S. stocks has surged. For these investors, stock splits are beneficial, especially for the target stocks such as Game Station, where retail investors gather, the impact will be greater.

Secondly, there are also media reports that after high-priced stocks such as Apple, Amazon, and Google have lowered their share prices through stock splits, it is also beneficial for these companies to be included in the Dow Jones Index. Because the Dow is price-weighted, if it includes high-priced stocks, the percentage change will be too large. A stock with a four-digit price added to this stock index is bound to immediately become the most influential stock in the broader market. And a stock split could solve that problem, thereby boosting the Dow’s inclusion of companies in the index.

Finally, stock splits reduce stock prices, which also helps high-priced stocks maintain their own stock price stability. With a 1:20 stock split, the daily price fluctuation of an individual stock will drop from $10 to $0.50, which of course means the company’s share price will be more stable.

In general, no matter whether the stock splits or not, the company’s fundamentals are solid and the prospect has great potential, which is a hard indicator for investors to hold the company’s stock for a long time. However, stock splits are not just a “belief game” in which investors are optimistic about the company’s fundamentals and continue to chase the company’s stocks. In fact, it has brought real benefits to individual stocks.

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