Nvidia will begin trading today at around $120 after a 10:1 stock split. Let's see what a stock split is and how it works.
In order to increase the liquidity of the stock and make it more affordable, a company may split its existing stock into several shares, a move known as a stock split. Because the split adds no actual value, even though the number of outstanding shares increases, the total dollar value of the shares remains the same. In essence, a stock split results in an increase in the number of company shares but also in a corresponding decrease in the share price.
How it works?
- Announcement: A stock split of a specified ratio (such as 2 for 1, 3 for 1, etc.) is announced by the company.
- Changing the number of shares: The split ratio is multiplied by the number of shares of each shareholder.
- Stock Price Adjustment: Split ratio is used to divide the market price of shares.
- Market Capitalization: After splitting, the total market capitalization of the company remains the same.
Let's see an example of a 10-for-1 Nvidia stock split:
Before the split
- The shareholder has 100 shares.
- The stock price is $1200.
- The total value of the stock is 100 shares * $1,200, or $120,000.
After the split
- A 10-to-1 split was announced.
- 10 shares of each stock are split.
- Now the shareholder has 1,000 shares.
- The cost per share is now $120 (1200/10).
- The total value of the stock equals 1,000 shares * $120, or $120,000.
What makes stock splits historically positive?
Sign of trust:
Companies usually announce stock splits after a significant increase in the stock price. This can be considered an indication that the company is optimistic about its opportunities for future growth.
Enhance liquidity:
The number of shares outstanding increases upon a stock split, which may enhance liquidity. More shares at a discount could attract more investors, even individual investors who may have been excluded before.
Well thought out deal:
A decline in stock prices may increase demand by making the stock appear more affordable to small investors. Investors may view a company priced at $50 as less expensive than a company priced at $200, even though the fundamentals of the stock remain the same.
psychology:
Historical evidence shows that stocks often perform well after a split, due to increased investor interest and psychological impact. This can lead to a self-fulfilling prophecy as increased demand pushes prices higher.