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
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.
Latest Answers