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MARKETSSTOCKS

What Is a Stock Split? What to Know About

Amazon’s 20-1 Split
The ins and outs of stock splits, which don’t happen as often as they did in the
past

By Michael Wursthorn Follow

Updated June 6, 2022 5:26 pm ET
Amazon.com Inc.’s AMZN -0.91% ▼ 20-for-1 stock split took effect Monday, the company’s
first since 1999. Stock splits change the stock price and not much else, but they can be
confusing anyway.

Stock splits rarely happen these days. Once nearly a given when shares topped $100 or so,
stock splits have all but disappeared from the corporate playbook. Stock splits by
companies in the S&P 500 faded from prominence after the dot-com bust in 2000, while
those by companies in the Dow Jones Industrial Average are even less frequent.

Amazon’s AMZN -0.94% ▼ split was announced and approved by the company’s board in
March.

What does the Amazon stock split mean for investors?

The total value of an investor’s Amazon holding didn’t change because of the split.
Shareholders as of May 27 got 19 new shares for each share they owned; the market price
for each share is now 1/20 of the presplit price. Amazon shares, which closed Friday at
$2,447 a share before the split, finished Monday around $125 after rising about 2%.

What is a stock split?

Each company shareholder at the close of business on the day the stock split goes into
effect will receive additional shares for every share they hold. If a company announces a 4-
for-1 stock split, the shareholder will get three additional shares. The price of the original
share will be divided by four, so that a share trading at $400 would trade at $100 after the
split.

Stock splits help entice investors who might be put off by a high share price. But that might
be less relevant now than in the past. Brokerages such as Charles Schwab Corp. give clients
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the option of buying a fraction of a share for as little as $5, opening up a range of pricey
stocks to mom-and-pop investors.

What happens to the company’s dividend?

It depends on what the board decides. If the company holds its dividend steady, its next
payout would split along the same lines as the stock—a dividend of $1 after a 4-for-1 stock
split would be 25 cents. Amazon doesn’t pay a dividend.

What happens to options bets?

What happens to options bets?

Options contracts owned at the time of the split are recalculated through a process known
as “being made whole.” The Options Clearing Corp. has rules and procedures in place to
modify contracts so that the holder isn’t affected by the split. The contract is adjusted to
reflect the new price and number of shares, but its value remains the same.

In a 4-for-1 split, a call options contract that covered 100 shares with a strike price of $100
each would cover 400 shares with a strike price of $25.

What happens to fractional shares of companies that split?

What happens to fractional shares of companies that split?

Again using the example of a 4-for-1 split, investors who hold less than one share ahead of
the split will receive three additional fractional share equivalents. An investor holding half
a share before the split will end up holding two shares after the split. An investor holding a
quarter of a presplit share will end up with one share afterward. Anyone with less than a
quarter share will hold a fractional share following the split.

What does a stock split mean for the company?

What does a stock split mean for the company?

Other than a lower stock price and more shares outstanding, mostly nothing. Splits don’t
affect a company’s value, although they have a history of generating a short-term pop in a
company’s stock price.

Stocks in the S&P 500 tend to rise 5% in the year following share splits, including 2.5%
immediately following the announcement, according to research from Nasdaq Inc. on
splits between 2012 and 2018.

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What does this mean for the stock market?

In most cases, stock splits have no impact on the broader stock market. The S&P 500, the
index most closely followed by many investors and portfolio managers, is weighted by
firms’ market value, so a split has no impact. The Dow Jones Industrial Average is a
different story. A stock split won’t shave any points from the blue-chip index, but it will
make a splitting stock less influential in it.

The Dow is a price-weighted index, meaning the higher the share price, the bigger the
influence that stock has over the index’s daily price swings. In addition to causing the stock
to have a smaller role in the Dow’s moves, the change could affect the performance gap
between the 30-stock index and the broader S&P 500.

How popular are stock splits now?

Apple Inc. and Tesla Inc. split their stocks in 2020, but aside from the splits at a few tech
giants, the strategy doesn’t seem to be in vogue. Google parent Alphabet Inc. unveiled
plans for a 20-for-1 split in February that is expected to take effect in July.

And several stocks that haven’t split in recent years have continued to rally.

Berkshire Hathaway’s Class A shares trade above $460,000. Another class it created in
1996 to help encourage more participation by individual investors trades above $300 and
is in the S&P 500. Berkshire split shares of that second class in 2010.

Why were stock splits more popular in the past?

Companies were more likely to split their shares in the past in part because of the
mechanics of trading. Trading wasn’t powered by fast-moving digital systems and was
costlier to small investors. Buyers got better prices if they were willing to buy round lots of
100 shares rather than so-called odd lots, which carried steeper commissions. A share split
helped keep stock prices in check for investors who were willing to buy blocks of 100
shares at a time.

Commissions largely don’t exist anymore at most do-it-yourself brokerages, such as

Schwab and TD Ameritrade Holding Corp., eliminating that concern. Still, most
institutional investors continue to prefer blocks of shares since the price often quoted on
an exchange is for a round lot, according to Phil Mackintosh, Nasdaq’s chief economist.

What options do investors have for high-price stocks that don’t split?

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They have three options: paying up; buying shares of other firms that trade for less; or
purchasing a fraction of a share, an alternative recently offered by some retail brokerages.

But fractional shares come with a caveat: Buyers don’t get the actual share. Instead, the
brokerage does, and investors have a right to whatever portion they agree to buy—which
means proportional dividend and voting rights, among other things.

—David Marino-Nachison contributed to this article.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

Appeared in the August 29, 2020, print edition as 'The How, Why And Why Not Of Stock Splits'.

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