Why stock split? the strong reasons and impacts

stock split

The U.S. stock split is probably one of the first few topics in my book “The Rules of Super Growth Stocks Investing” that aroused readers’ recollection (see section 5-6 of my book for details).

U.S. stock splits attract Taiwanese investors

I have summarized that there are two main reasons why readers are very interested:

  • Taiwan stocks do not have exactly the same mechanism: barely speaking, only stock dividends in Taiwan stocks are similar to the stock split of U.S. stocks. In my memory, before 2000, many listed companies in Taiwan stocks still issued stock dividends, but recently there have been very few.
  • It is the main factor in the creation of super growth stocks: as I said in the book, successful US stock market companies have undergone multiple stock splits, and almost no one is exception. The problem is that after the split, the stock price can rise back to the original stock price level to be useful, otherwise the split of the stock price will fail.

Rule of thumb and my experience

There is no definite criterion for the US stock split; but one thing is certain, as I wrote in the book, the management team is optimistic about the company’s future business prospects. Of course, there are very few cases where the management team misunderstood, but after all, it is a minority, I have experienced it myself. The US stock split is mainly decided by the board of directors.

Before joining the Dow Jones Index, the stock price have to be divided if it is too high. I have explained this in the book. Another reason is inflation. Because money has become thinner, the value of US$ 100 in 2000 should only be worth US$ 58.9 today (I calculated based on the actual inflation rate in the United States).

In the past two decades, stock splits have been relatively unpopular in U.S. stocks. I think it is mainly the trend of the times. Before 2000, few stocks would cost more than US$ 100. Most companies hoped that their stock prices would fall between 25-50. This was a common stock price range at that time; fewer stocks fell in the US$ 50-100 range. And will be classified as high-priced stocks, and will be divided at any time.

IBM is one of well-known stock with a price of more than US$ 100 all the year round. Everyone thinks that IBM’s stock price is more than US$ 100 for granted, people do not expect other stocks can enjoy a price of more than US$ 100. Isn’t it boring? But it is true. So most of the stocks of that era would be split as long as they were close to US$ 100. With inflation counted, the current US$ 100 is about US$ 58.9 in 2000, that is, the current stock price of 100 should be split!

Disadvantages of stock split

However, the split will cause many difficulties in the calculation of indexes and ETFs. Apple (ticker: AAPL) and Visa (ticker: V) were asked to carry out stock splits of 7-for-1 and 4-for-1 respectively before joining the Dow Jones index; otherwise the current Dow would be Change the apple index and tilt towards Apple (Apple did a 4-for-1 split again after joined Dow Jones index). Coupled with the change of the times, and online brokers have become the mainstream, and they no longer charge commissions or handling fees based on the number of trading shares (but by transaction), most are zero fee, so the brokerage no longer have any incentives (brokers represent the interests of Wall Street).

stock split

Disadvantages if no stock split

So these factors have caused the U.S. stock market no longer be popular for split in the past 20 years. But high-priced stocks will be split sooner or later. The two super growth stocks mentioned in my book: The Trade Desk (ticker: TTD) announced a ten-for-one split on 5/10/2021, and nVidia (ticker: NVDA) also announced on 5/21/2021 four-for-one split plan.

If high-priced stocks do not undergo stock splits, it will affect their stock liquidity; indirectly, they will affect the company’s valuation and stock price valuation. This is also why Alphabet (tickers: GOOGL and GOOG) and Amazon (ticker: AMZN) both choose to carry out a 20-share split plan in 2022. The biggest reason is to hope that more retail investors can afford them. stock and increase the influence of the company.

You can refer to the introduction of my other blog post “The valuation influence of stock liquidity and stock split on listed companies.”


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