| Market Insights in Two Minutes – Stock splits are far less common today than they were in the 1980’s and 1990’s. However, with some high-profile companies starting to announce stock splits (Amazon being the most recent with a 20 for 1 split last week), we thought it was a good time to analyze the data on how stocks perform after a split takes place. First, a stock split does not change the value of the stock you own in a company. Would you rather have four quarters or a dollar? It doesn’t matter, and the value is exactly the same. That’s all that is happening when a stock splits – you get a higher number of shares, but each share is worth less. In the past, companies have argued that splitting their shares attracts more investors because they can buy a share of the company with less money. We think that reasoning has some merit, but less so today with most brokerage platforms allowing retail investors to buy fractional shares. In terms of performance, the data says that buying a stock just because it recently split is not a useful strategy. Although you see some outperformance over the following 1-2 months, over the following year the returns are essentially the same. |
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