Hi readers,
First time ever since 1999, Amazon announced that they are doing a 20:1 stock split.
Let’s understand…
What is a stock split, and the benefits of it?
What this means for current Amazon shareholders?
And if you’re not yet invested in Amazon, should you buy the stock BEFORE or AFTER the split?
What is a Stock Split?
To best illustrate what is a stock split, we can use the analogy of a pizza.
Imagine all of Amazon’s shares represents one full pizza.
The 20:1 stock split “slices” Amazon shares into 20 pieces.
This changes two things:
(1) No. of shares
If you currently own 1 share of Amazon, you will now own 19 additional shares.
(2) Price of shares
Currently, Amazon share is about $3000 USD.
After the split, Amazon’s share price will DROP to $150 per share.
(Quick math, $3000/20=$150).
What’s something that doesn’t change?
The fundamentals of the stock.
It’s still ONE FULL pizza, just sliced into more pieces.
What are the benefits of a stock split?
Stock splits are an effective way to increase liquidity.
It allows people to take advantage of the lower stock price, which makes the stock more accessible for retail investors.
Imagine paying up $3000 USD just to buy one share of Amazon.
After the split, you can buy Amazon at about $150 per share (depending on share price in June-July upon exercise of the stock split).
Also, if you trade options, this is a huge reduction in your trading cost.
You can now sell Amazon put options 15,000 USD ($150 x 100) at minimum.
Instead of forking up 300,000 USD ($3000 x 100) for one contract.
(Who has the money to do that?!)
It’s a ginormous amount, even for hedge funds and institutional investors.
Buy now or later?
Watch this video to find out…
Why is Amazon doing a stock split?
What is the impact on current shareholders, and
Should buy Amazon before or after the split?
Have an amazing rest of the week!
Cheers,
Tess