Amazon stock split. On Friday, each share of Amazon stock was worth $2,447. On Monday, each share of stock was worth almost $125. On paper, that’s a drop of about 5,000%.
On Monday, though, Amazon shareholders did not lose any money. Even with the short-term capital gains tax, they would have made money if they had bought Amazon shares on Friday and sold them on Monday. This is because the stock closed higher.
This is because the company did a stock split for the first time in 23 years. A stock split is when one share of stock is split into more than one share. Most companies do 2-for-1 or 3-for-1 stock splits, where shareholders get an extra one or two shares that are worth the same as one share was worth before the split.
On the other hand, Amazon split 20-to-1. Here’s what that means and why shareholders might benefit from it.
What is a 20-for-1 Split when it comes to Amazon Stock?
When Amazon made the unexpected decision in March to split its stock 20 for 1, and the split finally happened on June 6, everyone was watching Wall Street to see how they would react to the new share price and what new price targets analysts would set for the stock at its new price.
A 20-for-1 split means that for every share of Amazon stock that was owned before Monday, the owner got 19 more shares. Since Amazon shares ended trading on Friday at $2447, they were worth about $122, or $2447 divided by 20, before markets opened on Monday.
Alphabet, the company that owns Google, is thinking about a 20-to-1 stock split that will start on July 15.
Since the share prices went down in proportion to the number of new shares, Amazon’s market value stayed the same after the split.
Amazon said that the split makes the stock “more accessible for anyone who wants to invest in Amazon” and gives employees “more flexibility in how they manage their equity in Amazon.”
A stock split doesn’t make shareholders lose money, just like Amazon’s market value doesn’t change.
Is it good to split stocks? Should you buy before a stock split or after?
Stock splits are usually seen as a good thing because they show that a company has done so well over time that a single share has become too expensive for the average retail investor to buy.
In theory, stock splits shouldn’t change the prices of shares once they go into effect because they are mostly just cosmetic changes.
But Bank of America research analysts say that since 1980, S&P 500 companies that announced stock splits “significantly outperformed the index 3 months, 6 months, and 12 months after the announcement.” Over the course of a year, stocks that split up gained an average of 25%, while the S&P 500 gained only 9%.
According to their research, it’s better to buy a stock before it splits so you can get a piece of the action before it shoots up.
But it’s important to remember that “some of the outperformance is likely due to momentum,” as the analysts wrote in a research note that came out after Amazon announced its split on March 9.
“Once the split is done, investors who wanted to get into the market or get more exposure may rush to buy.” In the end, they wrote, a stock’s direction is determined by how strong a company is.
But as of June 6, Amazon’s stock has gone down by more than 11% since the split was announced. But this comes at a time when tech stocks have been going down because people are spending less because of inflation and fears of a recession. During recessions, tech stocks have not done as well as other sectors like consumer staples and health care.