The famous e-commerce giant Amazon (AMZN -1.11%) announced a 20-for-1 stock split after the market closed on March 9. Prior to the move, speculation for the move had risen since the stock price reached thousands of dollars per share.
It could be long overdue. As of this writing, Amazon was trading at $2,910 per share. While many brokerages allow investors to buy fractional shares, large stock prices sometimes discourage folks from buying. Let's look at the details from the announcement and what investors should know.
Amazon announced a 20-for-1 stock split on March 9. Image source: Getty Images.
Would you prefer 40 quarters or 10 $1 bills?
First, the change will not go into effect instantly. The stock split will need to be approved by shareholders at the annual meeting on May 25. If it clears that hurdle, each shareholder on record as of May 27 will have 19 additional shares for every share held around June 3.
The stock price will begin trading on a split-adjusted basis on June 6. So don't panic when you notice your Amazon share price has fallen substantially on June 6.
Importantly, this does not mean your ownership of the company has increased. Instead, it will only mean that your shares are split into more pieces. You can change a $10 bill into 10 $1 bills or 40 quarters; in the end, you still have $10 regardless of how you slice and dice it. This is precisely what a stock split does; it slices ownership into more pieces while overall ownership remains unchanged.
Similarly, if you owned all 100 shares of a company that earned $100 in net profit for a year, your earnings per share would be $1 and $100 in total. If there were a 20-for-1 share split in this company, you would have 2,000 shares, and your earnings per share would be $0.50 and still $100 in total.
What this could mean for investors
Stock splits tend to generate enthusiasm around a company. It could also attract new investors who were unwilling to pay the higher per-share price. However, as mentioned, other than potentially attracting new investors, there is no noticeable change.
On net, however, the move is positive because it opens up the company to new buyers, which usually has a lifting effect on the share price. Indeed, Amazon's stock is up 4.5% following the announcement.
The stock is down 14% year to date as economies reopen and the tailwind from consumers shopping online in the face of the pandemic is fading away. Attention shifted away from its challenging near-term prospects will be a welcome sign for Amazon management.
This will be Amazon's fourth stock split since it IPO'd in 1997 but its first in over 20 years. Amazon shares are up a whopping 4,300% since its last split was announced. Shareholders are hoping for similar results over the next 20 years.
