Alphabet (GOOGL 9.57%) (GOOG 9.35%) is joining its tech peers in a stock split. The trillion-dollar tech giant, which is the parent company of Google, plans to do a 20:1 stock split on Friday, July 15.
If you're aiming to buy Alphabet before the stock split, the clock is ticking. Fortunately, you don't have to buy whole shares to invest in the company. You can buy fractional shares right now and potentially watch those shares convert into whole shares after the stock split.
Here are some quick points to consider if you're thinking about buying fractional shares of Alphabet before the stock split.
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Stock splits shouldn't be the main reason you invest in a stock
Although stock splits can be exciting, they should not drive your investing decisions. You shouldn't be tempted to buy a stock because the company is pursuing a split. There are cases when the stock price jumps up following a stock split, but you can't guarantee a victory over the long run.
Before investing in a company, you should turn your attention to the underlying business. Do your research to see if the investment opportunity aligns with your goals.
If you have no idea how to get started, here are a few questions you should consider during the research phase:
- Does the company have a competitive advantage or economic moat?
- Who is on the management team, and what's their track record?
- Are there any industry trends that could impact the company?
- Is the company taking advantage of technology and innovation?
- What are the company's latest financial statement results?
- Are the company's top revenue streams sustainable?
After you've done your due diligence, you can determine if you want to buy whole or fractional shares of a stock. A whole share of Alphabet's stock would be around $2,200. If that's too steep, you can set a dollar amount that works best for you and buy fractional shares if your broker allows it. For example, if you only have $550 to allocate toward your investing goals, you would get approximately one-fourth of a whole share of Alphabet.
Don't dismiss stock splits altogether
Although stock splits probably shouldn't be the main driver of your investment decisions, you should still understand how they work.
A stock split makes a high-priced stock more affordable for the average investor. Let's say a stock is valued at $2,000 per share. After a 5-for-1 stock split, each share would cost around $400. If you add up the value of all your shares after a stock split, they would equal the presplit price (assuming the stock price stays the same).
You should also know that more shares does not equal more money after a stock split. A stock split in and of itself will not change the company's valuation. Instead of trying to time a stock around a split, you should focus on adding high-quality stocks to your portfolio that can perform well over the long term.
Buying fractional shares before a stock split
A stock split will multiply the amount of Alphabet shares you have in your portfolio. This is the case even if you have fractional shares.
Let's say you buy one-fourth of a share of Alphabet before the stock split. You will have five shares of Alphabet after the 20:1 stock split. But if you decide to postpone your purchase, you will be able to buy a whole share of Alphabet at a reduced price later.
One of the best perks that fractional shares offer is the opportunity to diversify your investments. Let's say you have $2,000 and you want to make your first investment. If shares of Alphabet are priced at $2,000 per share and you only have $2,000, you'll have to throw all your money at one investment. But by taking advantage of fractional shares, you can stretch that $2,000 among different stocks by buying a percentage of each one.
Don't let a stock split interfere with your financial goals
Stock prices tend to rise days before a stock split, but that's not the case in every situation. If you've done your homework and want to add Alphabet to your portfolio, you have options. You can buy whole or fractional shares before the stock split if you want to claim your stake in Alphabet now. But you can also wait until the share price is reduced and grab shares after the stock split.
Instead of timing your investment around a stock split, it's best to look at your financial situation and see what makes sense for you. Tapping into your emergency fund now to get shares of Alphabet before the stock split could leave you with financial worries. One strategy is to grab fractional shares now and accumulate more shares after the stock split if you want to add Alphabet to your portfolio.
