Google Stock Split: Investor Impact & Future Outlook

What is a Stock Split?

A stock split is a corporate action where a company increases the number of its outstanding shares while proportionally reducing the price per share. The total market capitalisation of the company remains unchanged, meaning the overall value of shareholders' investments stays the same. Companies typically execute stock splits to make their shares more affordable and improve liquidity, often through a forward split.

There are two main types of stock splits. A forward stock split increases the number of outstanding shares, reducing the stock price, while a reverse stock split decreases the number of shares, raising the price per share. The stock split ratio, such as 2-for-1 or 3-for-1, determines the number of additional shares issued and the corresponding price adjustment. Common stock split ratios include 2-for-1, 3-for-1, and 3-for-2 splits, depending on the company's objectives.

Google's 20-for-1 Stock Split: What It Means

Google's 20-for-1 stock split, which took place on 15 July 2022, is a significant event that has garnered attention from investors and market analysts. This type of stock split means that for every share of Google stock an investor owned before the split, they now own 20 shares. The total value of the investor's holdings remains the same, but the number of shares has increased. This type of stock split is also known as a forward stock split.

The primary goal of the stock split was to make Google's stock more attractive to retail investors by reducing the stock price. The post-split share price of Google's Class A stock opened at $112.64 on 18 July 2022, which is significantly lower than the pre-split price of $2,255.34. By lowering the stock price, Google aimed to make its shares more accessible to a broader range of investors, thereby increasing market participation and liquidity.

Google Stock Split Ratio: A Case Study

To better understand Google's 20-for-1 stock split, let's break it down into a user-friendly table format:

This table illustrates how the stock split adjusted the number of shares and the stock price, making Google's stock more accessible to smaller investors while maintaining the company's market capitalisation. The increased number of outstanding shares improved liquidity, facilitating easier buying and selling for investors. Additionally, the move aligned with Alphabet's strategic goals, including potential inclusion in significant stock indices like the Dow Jones Industrial Average.

Why Did Google Split Its Stock?

Several factors contributed to Alphabet's decision to implement a stock split. One of the key reasons was improving accessibility for retail investors. With the lower post-split share price, smaller investors could purchase Google stock more easily, potentially broadening the company's shareholder base through forward splits.

Another factor was increased liquidity. More shares in circulation meant greater trading activity, allowing for smoother transactions in the stock market. This is particularly beneficial for institutional investors and funds that require high liquidity when buying or selling large volumes of stock.

Google's stock split also aligned with a broader trend among large technology companies. In 2022, major firms like Amazon and Tesla also conducted stock splits to make their shares more accessible. The trend suggests that stock splits remain a viable strategy for high-growth companies aiming to attract investors without altering their underlying financial performance.

Impact of the Google Split on Investors: Post-Split Share Price

The immediate effect of the stock split was that existing shareholders received 20 shares for every share they previously owned, while the overall value of their holdings remained the same. Although stock splits do not change a company's fundamental value, they often lead to short-term price fluctuations as investor sentiment shifts.

For retail investors, the split made Google stock more affordable, increasing demand among those previously unable to buy shares at the pre-split price. However, long-term performance still depends on factors such as revenue growth, market trends, and overall business fundamentals. Companies may also use reverse stock splits as a financial strategy to reduce their number of outstanding shares, thus increasing the price per share.

Institutional investors may also benefit from stock splits due to increased liquidity. A higher number of available shares makes it easier for large funds to buy and sell without significantly impacting the stock price. Stock trading becomes more accessible to a broader range of investors, inviting more participation from those who might be intimidated by high price points.

Mutual Funds and Stock Splits

Mutual funds can also undergo stock splits, although it is less common than individual stock splits. A mutual fund split occurs when the fund's net asset value (NAV) is split into a larger number of shares, resulting in a lower NAV per share. This process is similar to a forward stock split in individual stocks.

Mutual fund splits are typically done to make the fund more accessible to smaller investors. By reducing the NAV per share, the fund becomes more affordable for investors who may not have been able to invest in the fund previously. This can help mutual funds attract a broader investor base and increase overall participation.

It's worth noting that mutual fund splits do not change the underlying value of the fund or the investor's holdings. The total value of the investor's shares remains the same, but the number of shares increases. This means that while the NAV per share decreases, the overall investment value remains constant.

Market Capitalisation and Share Price

Market capitalisation, also known as market cap, is the total value of a company's outstanding shares. It is calculated by multiplying the total number of outstanding shares by the current stock price. Market capitalisation is a key metric used to determine a company's size and overall market value.

A stock split does not change a company's market capitalisation. The total value of the company remains the same, but the number of shares increases. This means that the stock price will adjust downward to reflect the increased number of shares. For example, if a company has a market capitalisation of $100 billion and 10 million outstanding shares, the stock price would be $10 per share. If the company undergoes a 2-for-1 stock split, the number of outstanding shares would increase to 20 million, but the market capitalisation would remain the same at $100 billion. The stock price would adjust downward to $5 per share.

Stock Split Affect on Trading Activity

A stock split can have a significant impact on trading activity. By reducing the stock price, a stock split can make the stock more attractive to retail investors, which can lead to increased trading activity. More investors are likely to buy and sell the stock when it is priced lower, resulting in higher trading volumes.

Additionally, a stock split can also lead to increased liquidity in the market, as more investors are able to buy and sell the stock. This can result in tighter bid-ask spreads and more efficient price discovery. Increased liquidity is particularly beneficial for institutional investors who need to execute large trades without significantly impacting the stock price.

However, it's worth noting that a stock split can also lead to increased volatility in the market, as investors react to the news of the split. This can result in increased trading activity, but also increased risk for investors. In conclusion, a stock split can significantly impact trading activity, and investors should be aware of the potential effects on the market.

Future Outlook for Google Stock: Market Capitalisation

Following the stock split, Google's shares experienced increased trading volume as more investors gained access to the stock. While stock splits do not change the company's overall valuation, they contribute to greater investor participation and trading activity.

The company's move to split its stock also raises the question of whether Alphabet could join the Dow Jones Industrial Average in the future. The lower post-split price makes the stock more compatible with the index's price-weighted structure, which typically avoids high-priced stocks.

Additionally, suppose Google's stock price rises significantly again. In that case, the company may consider another stock split in the future, similar to how other large-cap companies have approached their stock management strategies on various stock exchanges.

Conclusion

In conclusion, Google's 20-for-1 stock split was a strategic move to make its shares more accessible to retail investors and enhance market liquidity. While the stock split did not change the company's overall valuation, it contributed to greater investor participation and trading activity.

For investors, understanding stock splits—particularly their impact on share prices, liquidity, and long-term performance—is essential when making investment decisions. As more technology companies adopt similar strategies, stock splits will likely remain a key tool for improving accessibility and enhancing shareholder value.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.