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        Why Did Amazon's Stock Split Excite Investors?

        Views 4282022.09.21

        Amazon to split stocks and repurchase shares. What does it mean to investors?

        [What's New]

        At a time when US markets were recovering, Amazon announced after post-market on Wednesday that it would split shares 20 to 1 and buy back up to $10 billion in shares.

        official announcement

        Amazon is going to split its stock for the first time in more than 20 years, a period in which its shares have gained more than 3,600%* and expects to repurchase $10 billion in shares. It is another large-scale tech giant stock split following Tesla, Apple and Google.

        *: from the open price of $81.5 on Jan. 3, 2,000 to the close price of $2936.35 on Mar. 10, 2,022

        [Key Takeways]

        Would splits push stock prices higher?

        The stock split will not affect the fundamentals for a long term. However, it could improve the stock's liquidity for a short run. 

        Historical data shows that companies that announce stock splits outperform the S&P 500 during the following year.

        Since 1980, the S&P 500 member stocks have significantly outperformed the S&P 500 three, six, and 12 months after the first announcement of splitting shares.

        In reality, Amazon divided its stock three times before the dotcom bubble in 2000, and the stock has been generally an upward trendin the two decades thereafter.

        Amazon split might provide it with an opportunity to be added in the Dow Jones Index, according to some analysts.

        Tesla's stock rose more than 28% from Aug. 31, 2020, to Nov. 30, 2020, after it was added to the S&P 500 on Aug. 31, 2020.

        Amazon's net sales in the fourth quarter of 2021 were $137.4 billion, up 9% year over year, while net profit was $14.3 billion, up 98.6% year over year.

        What is a stock split?

        A stock split is when a higher-denomination stock is split into many lower-denomination equities.

        The value of shares owned by investors is unaffected by the stock split. The share price will drop after the split, but the number of shares will rise.

        Why stock splits matter?

        A company decides to split its shares primarily to increase the liquidity of the company's stock, which is common in higher-priced equities. Individual investors find it difficult to enter since the barrier for each hand of such shares is too high, resulting in a smaller shareholder base.

        The split enables the company to grow its investor base, attract new investors, and boost trading volume and liquidity. As a result, split shares are frequently seen by the investing public as an indication that the company's management is bullish on the stock price in the future.

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