Amazon, one of the world’s largest e-commerce giants, has long been a favorite among investors. With its innovative approach to online retail, cloud computing, and artificial intelligence, the company has become a household name and a key player in the global stock market.
Amazon had made headlines by announcing stock splits, a move that spiked the interest of both current shareholders and potential investors.
But what does this stock split mean, and how could it impact investors?
This blog will explore the details, including when Amazon’s stock split, why the company chose this strategy, and what it means for existing and new investors.
What is a Stock Split?
A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing additional shares to current shareholders. In a typical stock split, the value of each share is reduced proportionally, so the company’s overall market capitalization remains unchanged.
For example, in a 4-for-1 stock split, each shareholder would receive four shares for everyone they already own, but the price of each share would be one-fourth of its pre-split price.
The primary goal of a stock split is to make shares more affordable for retail investors without changing the company’s fundamental value.
Stock splits can also increase a stock’s liquidity by making it more accessible to a broader range of investors.
Why Did Amazon Opt for a Stock Split?
The stock’s high trading price primarily drove Amazon to initiate a stock split. Before the split, Amazon’s shares traded at a hefty price of over $3,000, making it less accessible to smaller retail investors.
By implementing a 20-for-1 stock split on June 6, 2022, Amazon drastically lowered the price per share, making it more attractive to individual investors.
This isn’t the first time Amazon has split its stock. So, the question ought to be asked: how many times has Amazon’s stock split in its history?
The 2022 split marked the fourth time Amazon split its stock, with the last in 1999. The previous splits were conducted during Amazon’s early growth stages to increase liquidity and attract more investors.
The 2022 stock split came when large-cap tech stocks, including Amazon, grew rapidly, leaving stock prices too high for many individual investors.
Amazon remains a dominant player in e-commerce, cloud computing, and artificial intelligence, so much so that Intel has Amazon as a customer for making Custom AI chips, making it a strong candidate for those seeking long-term gains.
Amazon’s move to split its stock is widely seen as a strategy to increase the affordability of its shares while maintaining its strong position in the market.
Impact of the Amazon Stock Split on Investors
Amazon’s stock split has different implications for current shareholders, new investors, and the overall market.
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For Current Shareholders
For those who owned Amazon shares before the split, the impact is straightforward: they received 20 shares for every share they held before June 6, 2022.
Although the total number of shares increased, the overall value of their investment remained the same because the price of each share dropped proportionally.
The split did not affect the company’s fundamentals, meaning Amazon’s underlying value didn’t change.
However, the lower price per share may increase the stock’s demand, potentially pushing its price higher over time.
In the short term, this move can make the stock appear more accessible, leading to more trading activity and potential gains for current shareholders.
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For New Investors
The stock split created an entry point for new investors who Amazon’s high stock price may have previously deterred. A lower per-share price makes buying whole rather than fractional shares easier for smaller retail investors.
This democratizes access to Amazon stock, allowing a broader group of investors to participate in its growth.
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Impact on Liquidity
Stock splits tend to increase liquidity in the market, and Amazon’s 20-for-1 split is no exception. Liquidity refers to how easily shares can be bought and sold without causing a significant price movement.
With more shares now available at a lower price, more investors can trade Amazon stock, leading to higher trading volumes.
Increased liquidity can reduce the bid-ask spread, making it easier for investors to enter and exit positions at favorable prices.
Potential Benefits and Risks for Investors
While Amazon’s stock split offers various benefits, there are also risks.
Let’s explore both sides.
Benefits:
- Increased Affordability and Accessibility: One of the stock split’s most significant advantages is that it makes Amazon stock more affordable for individual investors. Instead of shelling out thousands of dollars for a single share, investors can now purchase Amazon stock at a much lower price, making it more accessible to a wider audience.
- More Liquidity: As previously mentioned, stock splits increase the number of outstanding shares, improving the stock’s liquidity. This allows investors to buy and sell shares more easily and with less price fluctuation.
- Greater Flexibility: The lower price per share enables investors to buy more shares, giving them greater flexibility to manage their portfolios. For example, making smaller trades or diversifying holdings becomes easier without committing significant capital to a single stock.
Risks:
- Short-Term Volatility: Following a stock split, the increased trading activity can sometimes lead to short-term volatility. The excitement generated by a stock split may cause sudden price swings as new investors jump into the market, potentially driving up prices before they stabilize.
- Potential for Overvaluation: Another risk is that a lower stock price could attract speculative investors, leading to overvaluation. If the stock price rises too quickly due to increased demand, it may become overvalued relative to the company’s earnings and growth potential. This could expose investors to future price corrections.
Should You Buy Amazon Stock After the Split?
The decision to invest in Amazon stock post-split depends on your investment strategy and risk tolerance. If you’re a long-term investor who comprehends Amazon’s growth potential, the stock split could present an attractive opportunity to buy shares at a more affordable price.
Investors must also remember that a stock split while offering benefits like improved accessibility and liquidity, doesn’t change the company’s fundamentals. However, some portfolio strategists cite Amazon’s recovery of 26% in the 24 months after its split announcement.
It’s essential to evaluate Amazon based on its financial health, future growth prospects, and market position.
Additionally, given the possibility of short-term volatility after the split, it’s wise to monitor the stock’s performance closely and avoid making impulsive decisions.
Bottom Line
The Amazon stock split in 2022 marked the fourth time in the company’s history that it took this step to make its shares more affordable and increase market liquidity.
For current shareholders, the split didn’t change the overall value of their holdings but made their shares more tradable. For new investors, it opened the door to owning Amazon stock at a more accessible price point.
As with any investment, it’s crucial to weigh the potential benefits, such as increased affordability and liquidity, against the risks, like short-term volatility and overvaluation.
If you believe in Amazon’s long-term growth story, the stock split could be an excellent opportunity to buy shares.
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