What If I Tell You That Amazon Stock Price Will Reduce 📈 20 Times Soon!
So Amazon’s board of directors 👨💻 have recently approved 20 for 1 stock split subject to the shareholders’ approval in annual meeting scheduled for 25th May 2022.
This writeup 📝 is basically to educate you how the stock split works and what benefits or changes it bring to the investors of such companies.
If everything goes well & according to the plan, the current stock price of $2910 for one share will effectively become ±$145 which does not mean there has been any reduction of Amazon’s profitability💰, but it actually means there has been an increase of free float shares of Amazon now which mean on 25th May (or whatever date they decide), instead of current free float shares of ±500 million, they will become ±10 billion shares and each shareholder will be credited with 19 additional shares of Amazon per stock they hold.
Usually such a move translates to an immediate surge 📈 in the price of stock, as can be seen from the chart below when on the 10th of March saw a surge of 5.4% after the announcement 📣. This is because the general perception for a valuable company like Amazon is that it will become easier for anyone to buy the company shares they loved for long and hence more people can invest 💵 in it. Apart from stock split news, there was a news about buyback of upto $10 billion which might have also triggered the surge in stock price.
Now why do companies do this❓Usually the single biggest motivation for companies is to increase the liquidity for any company – which means now for small investors 👨💼 anyone can enter to buy at a low entry point [Imagine yourself buying a $3000 stock vs a $150 for the same company – which one is easier for you to buy?]. Although there are still options to buy partial stocks with different brokers, but that facility comes at a cost – so best a company can do is to bring the stock price 🤑 into the reach of masses.
Stock splits have been used by many companies in past as well to bring the value of stock price reachable to masses, like for example, Apple 🖥, the stock split history is as below 👇:
a 4-for-1 basis on August 28, 2020
a 7-for-1 basis on June 9, 2014
a 2-for-1 basis on February 28, 2005
a 2-for-1 basis on June 21 – 2000; and
the first 2-for-1 split on June 16, 1987.
This is shown in the chart 💹 below – you can see how the impact is seen at the time of stock splits on the share price each time:
💡Note: However, the price of stock you see on stock ticker is the current adjusted price so you might not be able to correlate with the chart above.
Similar impact 💥 can be seen in the stock price of GE (General Electric) – however, if you see the chart below, you will find an interesting stock split (or you can say stock reverse split in 2021) where 0.1 stocks for 1 happened and the stock price increased overall – this trick is sometimes implemented by the companies to avoid delisting. This is not the topic of this writeup ✍️, so I will keep it for some other day.
The same could have happened in Pakistan with multiple companies, but as this kind of data is not available in Pakistan easily – I am still working out for such examples to correlate, but if someone from the readers know of such examples, then please do comment below.
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