Some of the world's biggest and top-performing companies have announced stock splits this year. E-commerce giant Amazon (AMZN 0.81%) just completed its 20-for-1 stock split in early June. Alphabet (GOOG 0.32%) (GOOGL 0.37%), owner of Google, is set for a 20-for-1 split on July 1. And shareholders of electric vehicle maker Tesla (TSLA 0.66%) will meet in early August to approve a 3-for-1 split. That's just to name a few.
These stock splits don't change anything fundamental about the company or its stock. But they do lower the price of each individual share. Companies usually plan a split after their stock has had a great run. So, does this mean the number of stock splits recently was actually a clue that a correction was just ahead? Let's find out.
Why split a stock?
First, let's talk about why companies split their stock. It's important to see this as an individual decision for a company. It's not a result of the whole market performing well. Instead, companies make the move when their own stock has climbed a great deal -- and reached a price that's probably too high for many investors.
It's true that general market gains can lift stocks overall -- even some that don't have solid businesses or growth outlooks. But companies aim for a split when they know they truly have growth prospects that can once again result in future gains. So, a company that just happened to increase with the rest of the market wouldn't necessarily launch a stock split.
The companies I mentioned earlier illustrate this idea. They've been stock market stars.
Over the past three calendar years, Alphabet and Amazon climbed more than 100%. And Tesla surged more than 1,400%. As a result, their shares have reached into the thousands of dollars.
And, looking to the future, all three offer plenty of growth drivers. Alphabet's Google Search holds more than 85% of the market, Statista data show. Amazon is a leader in the e-commerce and cloud computing markets. And Tesla leads its market and has ramped up production to deliver more and more vehicles in the years to come.
An indicator of market movement?
Now, let's get back to the idea of this movement being an indicator of market declines. A market correction comes after a period of gains. So, if many stocks are doing well for quite a while, investors often start wondering about the next market downturn. And, as mentioned above, companies announce splits when business is booming and the stock price has climbed significantly. If more and more companies are in this situation, that's a sign the market is strong right now (or has been strong in recent times).
Times of strength -- and many stock splits -- don't last forever. For example, there were about 91 stock splits per year from 1998 through 2000. That's before the tech bubble burst. But this doesn't mean stock splits actually indicate a correction or crash is around the corner.
Instead, a great number of stock splits simply shows us the market and companies are doing well. At a certain point following these periods of strength, the market will correct. But it's impossible to predict the timing. It could happen right after a wave of split announcements or much later.
If we use nature as an example, we can say periods of sunshine are naturally followed by rain. The good news is the sunshine and bull markets do return.
What does this mean for investors?
First, when you hear about a wave of big stock splits -- don't panic. Even if the market declines right away or in the future, history tells us it will recover.
Second, use stock splits as an opportunity to get in on a strong company. If you believe in the company and its growth story and you plan to hold on for the long term, it's the perfect time to invest -- whether the market is set to correct or not.
