GameStop (GME +1.35%), the infamous meme stock of 2021, is back on investors' radar again. This month, the company announced a 4-for-1 stock split, which will take place after trading closes on July 21.
GameStop's stock split may come as a surprise to some investors since the current price per share is around $140. But if you're curious about the stock split and wondering if you should buy now, we've put together a few items to consider before you rush into a relationship with GameStop.
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Don't get caught up in the world of stock splits
High-profile companies have been lining up to engage in stock splits this year. Here are a few of the latest stock splits:
- Amazon had a 20-for-1 stock split on June 3.
- Shopify followed up with a 10-for-1 split at the end June.
- Alphabet, the parent company of Google, had a 20-to-1 stock split on July 15.
GameStop is next in line. Although GameStop's share price is nowhere near the four-figure price tag that Amazon and Alphabet had before their split, GameStop is still looking to slice their shares.
The video game retailer announced plans for a stock split on March 31. The company later confirmed a 4-for-1 stock split. All shareholders of record as of Monday, July 18 will receive three extra shares of GameStop for every one share they own on the day of the stock split. If you own five shares of GameStop before the stock, you'll notice 20 shares in your account after the split.
Although more shares of stock in your account sounds like a big deal, a stock split is more of a cosmetic change. Each share that investors own will be divided into smaller pieces. However, the overall value of your shares will remain the same. If you own 1 share of GameStop worth $140 before the stock split, you'll own 4 shares of GameStop worth $35 per share after the stock split. As you can see, the stock split in itself didn't make your wallet fatter.
Is GameStop's upcoming stock split a sign to buy?
Stock-split headlines have been grabbing the attention of many investors this year. But don't fall for the buzz -- it isn't a sign that you should buy a company. You can't judge the financial health and long-term trajectory of a company based on a stock-split announcement alone. Although the number of shares you accumulate in your account after a stock split can be attractive, there are other metrics that you should prioritize during the research process.
Here are a few items to consider before buying GameStop or any other company on your watchlist:
- How is the underlying business performing?
- How does the company make money? Are there any internal or external factors that can interfere with the company's profits?
- Is the company's revenue sustainable? What is the company's revenue trend?
- What do you know about the leadership team?
These are questions you should ask before you invest in a stock. Then, you need to figure out your goals, risk tolerance, and time horizon. If the investment doesn't match what you are seeking, it may not be the best investment for you.
What the stock split means for future investors
On July 22, GameStop will trade on a split-adjusted basis. If the stock price is $140 before the stock split, you'll be able to buy shares at around $40 per share after the stock split. If you don't get a chance to buy GameStop before the stock split, you can always buy shares after the split if it makes sense for your portfolio.
If you currently own GameStop and want to sell your extra shares, that is an option. You'll just have to prepare for capital gains taxes if you profited from your GameStop investment. But if you buy GameStop and hold on to it, you won't have to worry about capital gains taxes now.
Do your research to determine if GameStop deserves a spot in your investment portfolio. A stock split in itself won't make the company more valuable, so it's important to do your due diligence before moving forward.
What the stock split means for future investors
As an investor, it's important to evaluate the underlying business you are buying. Don't count on a stock split to help you make the best decision for your portfolio. Extra shares in your portfolio sound great, but it shouldn't trump the underlying business performance.
Before you buy GameStop, make sure the investment aligns with your goals and risk tolerance, and you'll be in better shape over the long term.
