I don’t invest in $GME, but I noticed their investors are very excited about the stock splitting later this month. What does that mean and what are the implications?
I gather that if you owned one stock, you’ll own four after the split, but I’m not really sure why that’s cause for so much celebration.
Thanks!
In: 5
You’re correct, GME shareholders will receive 4 new shares for every 1 share they currently hold. As to the “why”, it is usually done to manage the share price. The 4 new shares of GME will be at 1/4 the price of the old shares when the stock actually splits. The idea is that lower prices are more attractive to a larger group of investors who might otherwise be priced out.
> [That is around the $30 pre-split price target Wedbush analyst Michael Pachter assigns the stock, which he rates at Underperform. “Makes it more affordable for unsuspecting rubes who haven’t yet lost all of their money,” Pachter told Barron’s via email when asked about the split.](https://www.barrons.com/articles/gamestop-stock-split-4-for-1-51657142058?mod=djem_b_Weekly%20Barrons%20feed%20for%20last%2024%20hours)
This appears to be the Bearish opinion. What is the Bull opinion?
All a stock split does is increase liquidity. People over blow the meaning of a stock split. A single stock at $1000 split 10-1 will now be $100 and everybody gets 10x the amount of stocks they had. This does 2 things: the price looks more attractive to people, and you are more easily able to sell smaller portions of stock.
Pre stock split, people will see $1000 a stock and figure they can’t afford it, and that it is riskier. The latter isn’t necessarily true, but people think in funny ways. The former is a value of splitting the stock, it allows people with less money to invest in the stock. However, this is largely negligible. Most stock activity is done by people with a lot of money, so if we are allowing people who couldn’t afford $1000 to invest, they aren’t going to up the investing activity all that much.
Overall, nothing much else changes. Stocks are simply a portion of a larger sum. Market cap / # stocks = stock price. Changing the denominator does not change the value of the company at all except for the slight increase in investment activity explained above. Large institutions don’t really look at stock price, they care about the total cost of the company. The stock is just a more easily discussed number.
In the ‘old days’ in the stock market (1999 and before), “odd lots” – which are purchases of less than 100 shares – were not always easy to buy or sell, and you generally got a lower price if you were selling or a higher price if you were buying, than you would have for a “board lot” (100 shares). The retail public didn’t like very expensive stocks as it was hard to pony up $25,000 to buy a board lot of a $250 stock.
“Splitting the stock” does nothing for you financially. Let’s say the company had a million shares at $250, and splits 5-for-1. Before, you had 100 shares at $250, or $25000. After, you have 500 shares at $50 – or $25000. But now it’s a lot easier for other retail investors to throw in $5000 and buy a board lot themselves.
So, naively, one might think the stock split is bullish for the stock. If it’s easier for other people to buy it, won’t that increase demand for the stock, and thus its price? However, finance veterans look at stock splits as bearish.
You have created more shares, thus you have created more supply. Many people who previously had two or three hundred shares now have a thousand or more. The natural human reaction is “I had 200, now I have 1200 – I’ll sell 200 and still have a thousand shares!” All this new selling sends the price down. So it’s quite typical to see a company’s stock drop slightly after a stock split.
It just makes the stock more granular in your ability to sell/buy. EG if the stock price was $1500 but you only had $1000 to invest, you couldn’t buy the stock.
Post stock split (let’s say it was a 3:1), you can now buy two stocks
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