NVIDIA (EuroJournal:NVDA) is a popular manufacturer of graphics chips, and the tech company’s shares come at a high price — more than $800 per share as of the end of June.
Soon, the price per share will be much lower since the company announced a four-for-one stock split in May. Beginning on July 20, shares are expected to begin trading on a split-adjusted basis, which means the price per share should fall to somewhere around $200.
Nvidia shares are up more than 30% since the split was announced. But while hype surrounding the split may be driving some of this price increase, the reality is investors shouldn’t care at all that about the split. Here’s why.
Here’s why Nvidia’s stock split doesn’t matter
While stock splits change the per-share price, they have no actual impact on the underlying value of the company or its share value. Because they alter none of the company’s fundamentals, splits should have no affect on the long-term prospects of the business at all.
With a four to one stock split, investors in the company simply end up owning four shares for every one they owned pre-split. But the actual value of their investment hasn’t increased despite having more shares. Think of it this way: If you have one piece of pie and cut it into four pieces, you don’t have any more pie.
Fractional shares reduce the impact of stock splits
Now, companies sometimes split their shares in hopes of driving up demand since more people can theoretically afford to buy shares that cost $200 each instead of $800. Some investors also perceive a stock that costs $200 per share as being “cheaper” than one that costs $800, even though that’s not a good way of assessing whether a company’s shares are worth their price.
Still, the reduction in the per-share price can sometimes have a short-term impact on the stock price due to the company’s shares seeming more accessible. However, thanks to fractional shares, it’s becoming less and less likely that a split will have even this effect.
See, fractional shares allow anyone to buy fractions of shares, or partial shares, even if they don’t have enough investment capital to purchase a full share. Someone with only $200 no longer needs to wait for Nvidia to split in order to buy a stake in the company. Instead, brokers that allow fractional shares make it possible for any investor — even those with a few dollars — to specify how much they want to invest. That means someone with $200 could purchase 1/4 of a share today if they wanted.
Because fractional shares put expensive stocks within reach of any investor, a split shouldn’t open up a new customer base of people with lower account balances. Those investors could have already bought Nvidia anyway, regardless of the split. And there’s no functional difference between buying 1/4 of a share pre-split or waiting until after the split and buying a full share for the same cost.
The bottom line is, no investor should really care whether Nvidia is splitting or not, and the announcement should have no impact on your willingness to buy shares. You should add the stock to your portfolio only if you believe in the company’s business model and underlying momentum, not because it’s made the choice to make its shares appear cheaper on paper.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a EuroJournal premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.