Amazon recently announced that it was splitting its stock 20-for
1. This is the first time in more than 20 years that the tech giant has chosen to split its
shares the market seemed pretty excited by this news and amazon stock jumped about 5%
after the announcement was made what does all this mean for investors in amazon like me
here's everything you need to know about amazon stock split my name is Brian Feroldi
thanks to Quartr for sponsoring today's video let's start with the news so on march 9th 2022
amazon's board of directors approved a 20 for one stock split now the stock split and the
authorization to increase the number of shares still needs shareholder approval and that vote
will take place on may 25th 2022. if everything goes through as planned what will happen
is that on may 27th every shareholder of amazon will all of a sudden receive 19 additional shares
for each one they hold so if you own one share of amazon before the split you will suddenly wake up
with 20 shares of amazon after the split now this news really excited the markets and shares jumped
about five percent when the announcement was made and with shares currently trading about $2,900 per
share does that mean that investors are going to be in for a sudden windfall, unfortunately,
that's not how stock splits work see with amazon splitting its stock 20 for one the total number of
shares that are outstanding is going to go up by a factor of 20. to compensate for that the
share price also has to fall by a factor of 20. so with shares currently trading for about $2,900
each that means that those 20 shares you're going to get are going to be worth about $145 each which
is one twentieth the price so notice that if you had twenty nine hundred dollars invested in amazon
before the split you'll have twenty nine hundred dollars invested in amazon after the split another
common misconception about stock splits is that some investors believe that amazon stock will
have an easier time doubling or tripling with the much lower share price so some people believe that
a 145 dollar stock has a much higher chance of becoming a 290 dollar stock than a 2900 stock has
a chance of becoming a fifty eight hundred dollar stock well unfortunately that's not how it works
either rather than focusing on the share price i want you to focus on another important investing
metric and that is called market capitalization so what does market capitalization mean this is just
the total dollar value of a company's equity it's essentially a measure of what a company
is currently worth now the formula for market capitalization is extremely simple it's just the
last share price times the total number of shares that are outstanding so let's do that calculation
for amazon amazon is currently trading for about twenty nine hundred dollars per share but how
do we find out how many shares are outstanding well there's lots of ways that you can do this
one of the ways that i like is to go to the most recent earnings report and look at the
income statement at the very bottom of the income statement is listed the total number of diluted
shares that are outstanding as of the end of the year in amazon's case there are 516 million shares
outstanding currently so if we do that math 2900 share price times 516 million shares outstanding
that gives us a market capitalization of about 1.5 trillion dollars that is the current total equity
value of amazon's common stock and this number is easy to find up without doing that math if you go
to sites like yahoo or google it's always reported as one of the company's key statistics so if we as
shareholders are hoping that amazon stock is going to double doesn't really matter if the
stock is trading at $145 per share or $2,900 per share what we really think is going to happen is
the company's market cap is going to go from $1.5 trillion to $3 trillion dollars that's what needs
to happen for amazon stock to double from here all right i just threw a lot of information at you so
let's quickly recap before the stock split amazon was worth $1.5 trillion dollars and that was made
up of $2,900 share price times 516 million shares outstanding after the stock split goes through
amazon is still worth $1.5 trillion dollars but there will be 10.32 billion shares outstanding
and each of them will be worth about $145 so the before and after pictures on the market
capitalization are unchanged it's just the dollar price of one share that is really changing well
you might now be thinking well our stock splits non-events i actually think there's five good
reasons that investors should be happy about this stock split news which i'll get to next before i
do so i wanted to give a shout out to this video's sponsor which is Quartr quarter's mission is to
make every interaction between companies and their investors meaningful quarter does so by providing
frictionless access to conference calls investor presentations transcripts and earnings reports
from markets all around the world straight to your pocket for no cost if you're interested in
giving quarter a try for free simply visit the app store of your choice and search for Quartr
that's q-u-a-r-t-r all right so if indeed stock splits don't really matter that much
why do i think they're a good idea well let's turn to reason one after a stock split Amazon stock
become much more accessible to small individual investors a lot of investors don't like the idea
of buying into a stock that's trading at twenty nine hundred dollars maybe they don't have $2,900
to invest in one company or maybe their broker doesn't allow them to buy fractional shares
for that reason there are some investors out there that want to invest in amazon but because amazon
stock is trading at such a high dollar price they don't want to do that reason number two
to split the stock has to do with the company's own employees many of amazon's employees are
paid with stock-based compensation in some cases employees only own a handful of shares themselves
and if they want to sell their position they often have to unload a sizable portion of their amazon
position to do so by lowering the share price by a factor of 20 amazon's employees might have a
much easier time selling a portion of their stock instead of all of their stock to fund a purchase
reason number three has to do with the dow jones industrial average the dow jones industrial
average is one of the most famous stock market indices in the world but the dow uses a company's
share price to determine the weighting of the indices if you look at the current composition
of the dow 30 all of the companies that are in the dow trade between $47 and $500 dollars per share
if amazon was to be included in its current share price it would have about six times the weighting
of the current largest style component which is united health group and nearly 60 times the
weighting of the smallest dial component which is intel corporation for that reason there's
no way that the dow committee would currently consider adding amazon to the dow jones index in
its current incarnation reason number four has to do with options holders we've never talked
about options on this channel but if you want to buy or sell options all options transactions
take places in lots of 100 shares now 100 shares times a $2,900 stock price is $290,000 for each
option contract that's a lot of money even if you're managing quite a bit of money on your own
by splitting the stock 20 for one that reduces each option contract from $290,0000 all the way
down to $14,500 now that's still a lot of money in absolute terms but if you're interested in
buying or selling puts or calls on amazon it's much easier to do so with a lower share price
and then the final reason that it's a good thing once companies split their stock is there's
often a lot of short-term excitement we've seen this in recent years when other companies have
announced to split their stocks such as tesla when it announced a five-for-one stock split in 2020
its share price got a boost when apple announced a four for one stock split in 2020 its share
price got a boost when google announced a 20 for one stock split earlier this year
its share price got a boost now if you watch this channel for any period of time you know that we
focus on the long term and not the short term but given the positives that i just mentioned i don't
really see a reason for a company not to split their stock so when i think about companies like
shopify or equinix or mercado libre or autozone or booking holding given the five upsides i just
mentioned i think the positives of splitting your stock far outweigh any potential negatives
so yes while it's true that stock splits don't really create any actual value for shareholders
the positives of doing so really outweigh the negatives so i don't see any reason for companies
not to split their stock now in that same stock split announcement amazon also announced that it
was doing a stock buyback program if you'd like me to make an explainer video on what a stock
buyback is let me know in the comment section below hope this video was helpful brian out