Stock splits: The strange exception where a lower stock price can be better for investors
A lower stock price can actually be a boon for investors in some rare cases
NEW YORK — In some rare cases, a lower stock price can actually be a boon for investors.
Consider Nvidia, the chip company whose stock price has soared well above $1,000 as Wall Street's frenzy around artificial-intelligence technology keeps revving higher. The company recently said it would undergo a stock split, where each of its investors in early June will get nine additional shares for every one that they already own.
Such a split should send Nvidia’s stock price down by about 90%, all else equal. Each investor would still, though, hold as many total investment dollars in Nvidia as before the split.
Nvidia said it's making the move to make its stock price more affordable for its employees and for other investors. An investor may be more willing to buy a stock with a $100 price tag than one that costs $1,000, even if some brokerages allow investors to buy fractions of a company’s share.
What’s more, if history is a guide, Nvidia could see its stock prices continue to rise more than the rest of the market. “Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index,” according to the BofA Global Research’s research investment committee.
Of course, some of that outperformance may be because companies that tend to undergo splits usually do so only after a run of success where their stock prices have climbed strongly. And a stock split doesn’t guarantee an ensuing rise in price. Look at Tesla, which fell nearly 12% in the year after it announced a three-for-one stock split on Aug. 5, 2022. The S&P 500 rose 8% over that same time.
Tesla was one of the 30% of companies
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