Stock Split: What it is and how it affects your investments

When shares in NVIDIA hit over 120 USD, the semiconductor giant had every reason to celebrate its success. However, it carried out an operation that left some investors perplexed: it divided the value of its shares by 10. Yes, it made the company’s shares more affordable, but the total value of the company remained unchanged.

This move is not an eccentricity; it is a strategy known as a stock split. NVIDIA wanted to open the door to a new type of investor: those who are put off by high prices. The company stated that their aim was "to make share ownership more accessible to everyone”.

This is the idea behind a stock split, which is a common practice among companies whose shares are priced high. Find out what this strategy is, how it works, and how you can benefit from it.

What is a Stock Split?

A stock split involves a company increasing the number of shares in circulation by dividing existing shares into smaller units. This operation does not affect the total amount invested by each shareholder or the company’s market value. The unit price of each share decreases, potentially making it more accessible to a greater number of investors.

In a 1-for-4 stock split, for example, an investor who previously held one share worth €200 would now hold four shares, each worth €50. The total investment value remains at €200. The general aim of this operation is to increase the liquidity of the shares and attract new investors, particularly those with smaller savings and those who prefer to buy shares in larger quantities or at lower unit prices.

Although it doesn’t affect the company's fundamentals, a stock split can create a positive impression in the market. It is often seen as a sign of growth and confidence on the part of the company.

Why do companies choose to carry outStock Splits?

In theory, a stock split does not affect a company's market value or investors’ wealth. Although the number of shares increases, the total value of the company remains unchanged.

However, studies show that companies usually see their share price rise by between 2% and 4% in the short term following a stock split. This phenomenon, known as the ‘announcement premium’, reflects market optimism for a variety of reasons.

More affordable prices

The main purpose of a stock split is to ensure that share prices remain within an attractive range for various types of investors. If the price of a share becomes too high, it may be more difficult for less experienced investors to invest.

Maior liquidez

Lower share prices lead to an increase in market transactions. This increases stock liquidity, attracting more investors and boosting trading volumes.

A sign of confidence and growth

A company may choose to do a stock split to clearly signal its confidence in future results. If managers express confidence in the company’s continued growth, this can contribute to share appreciation.

Generate attention

A stock split attracts the attention of analysts and the press, thereby increasing the company’s visibility. This increased interest could lead to greater demand for the shares.

Market adjustments

In markets where share prices are adjusted in fixed increments (‘ticks’), a stock split can improve liquidity by enabling shares to be traded more easily.

What are the disadvantages of a Stock Split?

Following a stock split, shares with lower prices may appeal to investors with a more opportunistic or aggressive profile, resulting in sharper price fluctuations. This increased volatility may be undesirable for companies seeking a more stable and predictable share price evolution. Although a stock split often generates a temporary increase in share price and trading volume, these effects tend to be short-lived. If the company’s fundamentals do not justify the level of enthusiasm generated, the increase in the share price may be short-lived, with the price stabilising or declining soon afterwards.

The advent of fractional share investment, which allows investors to purchase only part of a share, has reduced the need for stock splits to make shares more accessible. Nowadays, many investors can purchase fractional shares without splitting them into multiples, thereby reducing the practical advantage of stock splits.

What is the difference between a Stock Split and Reverse Stock Split?

This operation occurs when a company decreases the number of shares in circulation, thereby increasing the value of each share proportionally.

For example, if an investor holds 1,000 shares in a company at €1 each and the company carries out a 1-to-2 reverse stock split, the investor will hold 500 shares, each valued at €2. Although the number of shares decreases and the price per share increases, the total value of the investment remains unchanged.

This operation is often used by companies looking to make their shares more appealing to institutional investors, or to avoid delisting from a stock exchange which may impose minimum price requirements on shares. Although it doesn’t affect the company's or shareholders' total value, the market may view the reverse stock split with some scepticism, as it is often carried out by companies whose shares are in decline.

What to do before and after a Stock Split?

If you have invested in a company that is about to carry out a stock split, now is the time to review your portfolio and analyse the company’s fundamentals in order to make an informed decision. If you want to act strategically, it is essential to prepare before the operation and know what to look out for afterwards.

Before a Stock Split

This is a moment that requires careful analysis, as informed management begins here.

1. Assess the company's financial health: Although the stock split does not change the intrinsic value of the shares, it may indicate that the company intends to make its shares more accessible to the market. Check whether the company has a history of sustainable growth, and analyse whether the stock split was a strategic decision or merely an attempt to improve public perception;

2. Understand the reasons behind the stock split: Ask yourself why the company has carried out the stock split. This operation generally takes place when share prices reach high levels, which makes them less accessible to individual investors. However, in some cases, a stock split can be a strategy to attract greater market attention and keep the share price within a more attractive range. Determine if this strategy aligns with the company’s actual performance or if it’s merely a marketing tactic;

3. Monitor the market reaction: The announcement of a stock split can temporarily increase interest in the shares, as investors may view them as more affordable. However, market reactions can vary. Keep up to date with the news and analyse how investors behave in response to the announcement before the stock split takes place. Market psychology can cause temporary fluctuations in share prices.

After a Stock Split

Now that the stock split is complete, it’s time to adjust your expectations, review your positions, and make sure your portfolio is still aligned with your investment objectives.

1. Re-evaluate your portfolio position: Following the stock split, it is important to review whether your investment in the company remains consistent with your strategy. If the stock split was carried out in response to financial difficulties, you should consider reducing your exposure to the company or diversifying your portfolio to mitigate risk;

2. Monitorize a evolução do preço das ações: Keep a close eye on price fluctuations in the days following the stock split, and analyse whether the increase in the number of outstanding shares is having a negative impact on the company’s performance. Remember that, in the long term, the value of a share depends on the fundamentals of the company;

3. Watch out for signs of volatility: One of the main risks following a stock split is an increase in volatility. A reduced price for more shares in circulation could lead to speculation;

4. Assess the impact on dividend strategy: A stock split may affect dividends. The amount paid per share may be adjusted to reflect an increase in the number of outstanding shares. This means that, although the number of shares increases, the dividend per share may proportionally decrease.

Managing Stock Splits with GoBulling trading platforms

Developed by Banco Carregosa, the GoBulling trading platforms are ideal for managing share investments during events such as stock splits. Its intuitive and customisable interface offers access to shares on global markets, performance analysis tools, and real-time notifications. This allows you to monitor market fluctuations and adjust your strategies with confidence. These platforms can be used on smartphones, tablets and computers to help you build a diverse stock portfolio and achieve financial independence.

Prepare your Stock Split strategy with the support of Banco Carregosa

Although stock splits may seem like mere technical adjustments, they have implications that deserve careful analysis, particularly for individuals seeking to manage their assets rigorously and strategically. Whether you want to understand the impact of a stock split on a company’s intrinsic value or decide how to reposition your portfolio after this type of event, there is room for reflection and identifying opportunities.

At Banco Carregosa, our role is to help investors understand market signals so they can adapt their strategies according to their goals and risk profile. If you need help building or adjusting your portfolio, or want to stay one step ahead when making decisions like this, our team is here to support you. Contact us.