Astute Alphabet (GOOGL & GOOG) investors may see some changes when logging into accounts this week. Google’s parent company Alphabet Inc. announced intentions a 20 to 1 stock split earlier this year. What does the split mean? – that’s the topic of this post.
Notable Stock Splits in 2022
- Amazon (AMZN) – 20:1 on 6/7/22
- Shopify (SHOP) – 10:1 on 6/22/22
- Alphabet (GOOGL) – 20:1 on 7/18/22
A company chooses to split stocks to recharacterize the number of available shares. When a stock splits, each investor will increase the number of shares owned, and the share price will decrease in the same proportions. Think of the split as an adventure in algebra, but the original ownership amounts, and invested principle remain unchanged.
For example, if prior to the split you owned one share of GOOGL at approx. $2200 – you would now own 20 shares at approximately $110 per share. The same multiplier applies to any number of shares owned. The accounting and movement occurs in the background so there is no action required of investors.
So why bother going through a stock split? On the surface the changes are minimal. However, the news creates a buzz around the company, often leading to an increase in demand and therefore share price. After the split, the cost to invest in a single share decreases which allows investment from a broader audience. Both are net positives for individual shareholders and the company alike. Large companies also benefit by increasing liquidity – companies have an easier time selling shares at $110 than they would at $2200 per share.
Alphabet has been one of the stronger stable performers looking back over the past decade. News of a split is exciting in the short-term, but long-term the underlying fundamentals continue to drive buy and sell decisions.
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