Stock Splits Cater to Retail Investors

Stock-Split Frenzy

When a company splits its stock, it retains its market value, with the number of shares proportionately increasing as the price per share goes down. With numerous companies announcing stock splits this year, including Alphabet (GOOGL), Tesla (TSLA), and Amazon (AMZN), the rate of split announcements by companies in the S&P 500 is at its highest in 10 years.

Most of the time companies assert that the decision to split was driven by an interest in providing more investors with access to ownership.

Trading for the People

A recent report found that 17% of S&P 500 companies had share prices over $500 in early February. Many individual investors are priced out at these levels — especially if they want to own a diversified investment portfolio.

With the trend of lower or even commission-free trading, outreach to individual retail investors is in vogue.

Risky Business

Some have expressed concern that more democratized investing poses a risk to the unsophisticated investor. Last year, hype about GameStop (GME) prompted a halt to trading activity on some platforms due to extreme share price volatility. Market observers also point to the popularity of stock splits during the dot-com era, sometimes by companies that ultimately saw pricing support evaporate.

On the other hand, if high-quality companies split their shares, some believe retail investors may have an opportunity to swap more volatile but often lower-priced shares of small capitalization companies for larger cap names. Ultimately, investors may want to consider the value supporting the price before clicking “buy.”

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