After exploding in the headlines back in March, Amazon's (AMZN 0.81%) stock split is set for this Friday, and its share price has been climbing higher this week in anticipation. After hitting a 52-week low last week, investors are seizing the opportunity and pushing the stock higher. This is your last chance to purchase shares before they split -- but should you?
Reasons to buy before the split
The main reason to buy shares before the split is the likelihood that the share price will rise before and after the split. It's already rising, up 13% over the past five days. That might be in part due to excitement as we get closer to the split date, but there's been so much market volatility over the past few months that upticks and downswings may be more connected to general market conditions. Even at its current price of a cool $2,450, Amazon stock is down 27% year-to-date, so investors shouldn't be too surprised to see the stock swing back up.
Image source: Amazon.
Historically, stock splits have generated price increases. But why? They stir investor interest, for one thing. After the split, the split-adjusted price appears to be very low, adding even more interest. If you buy one share today, that single share will become 20 after the split. Therefore, any post-split upswings in price will be seen across all of those 20 shares.
Reasons to wait until after the split
With a price tag that's still more than $2,400 per share, even one share of Amazon stock may appear to be too expensive for many individual investors, which would be a reason to hold off on buying until after the split. These days, many brokerages offer fractional shares, so investors can get a piece of the pie even if they can't manage to buy a full share. But that option is not available to all investors, and some people may not want to use fractional shares for their own reasons.
Based on Amazon's current price, each new share will be worth about $120 after the split. That's much more affordable for many investors. It's not actually cheaper, since the new structure means that each previous share gets split into 20 separate ones. Splitting stock is just like cutting a pie into more pieces: The pie itself stays the same size, it's just cut into many more pieces.
Key metrics will adjust accordingly. The price-to-earnings ratio, for example, won't change, since the earnings per share will change with the new amount of shares. Ultimately, the actual value of each share remains the same. The perceived low price, however, can be attractive.
Some of the jump in price that typically accompanies a stock split won't happen until after the split, so you can still benefit from that initial boost if you buy after.
Does it matter?
This is Amazon's fourth stock split. The other three all happened between 1998 and 1999, and Amazon's stock price has increased nearly 4,000% since the last split.
Amazon is obviously a very different company today than it was back then, and even in another 23 years, it may not gain another 4,000%. But if you believe the company has continued potential, it doesn't matter in the long term whether you buy before or after the split.
I don't recommend thinking too much about the chance of a quick uptick in the price sometime over the next week or so. If you buy Amazon stock, buy it for its huge market, almost unlimited opportunities, disruptive nature, and great management. If it makes sense for you to wait until after the split when each share costs less, you won't lose out if you focus on the long-term goal.
