Nvidia will start trading today around 120$ after the 10:1 stock split. Let’s see what is a stock split and how it works.
In order to
increase the share’s liquidity and make it more affordable, a corporation may split its existing shares
into many shares, a move known as a stock split. Because the
split adds no actual value, even though the number of shares outstanding rises,
the shares’ total dollar worth stays the same. In essence,
a stock split results in an increase in the company’s share count but also a corresponding decrease in share price.
How does it work?
- Announcement:
A stock split with a specified ratio (such as 2-for-1, 3-for-1, etc.) is
announced by the corporation. - Change of
Share Count: The split ratio is multiplied by each shareholder’s share count. - Share Price
Adjustment: The split ratio is used to divide the market price of the shares. - Market
Capitalization: Following the split, the company’s overall market
capitalization stays the same.
Let’s see an example with Nvidia’s 10-for-1 stock split:
Pre-split
- A
shareholder has 100 shares. - A share costs $1200.
- Shares
total worth is equal to 100 shares * $1200, or $120,000.
After-split
- A 10-for-1
split is announced. - 10 shares
are divided from each share. - Now, the
shareholder has 1,000 shares. - One share
now costs $120 (1200 / 10). - Shares
total worth is equal to 1000 shares * $120, or $120,000.
What makes
the stock split historically positive?
Sign of
confidence:
Stock
splits are usually announced by companies after a major increase in share
price. This could be seen as an indication that the business is optimistic
about its chances for future growth.
Enhanced
liquidity:
The number
of outstanding shares rises when the stock is split, which may enhance
liquidity. More shares at a reduced price could draw in more investors, even
retail ones who might have been crowded out previously.
Perceived
bargain:
Reduced
share prices may increase demand by making the stock seem more accessible to
small investors. Investors may view a company priced at $50 as more affordable
than one priced at $200, despite the fact that the stock’s fundamental remains the same.
Psychology:
Historical
evidence shows that stocks often do well after a split, owing to increased
investor interest and psychological impact. This can result in a
self-fulfilling prophecy in which growing demand drives prices upward.
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