What is a stock split and what are the implications for Nvidid

Following Nvidia’s surge past a $3 trillion market cap this week, the chip designer is set to trigger a 10-1 stock split after market close tomorrow. Sam North, Market Analyst at Investment platform eToro, explains what stock split is, why Nvidia are doing this, and what it means for investors.

Why do companies halve stocks?

“Companies often perform stock splits to make their stock more accessible to a wider range of investors. When a stock’s price gets too high, it can become difficult for some investors to purchase whole shares. A stock split can reduce the price per share, making it more affordable for individual investors to buy. With Nvidia doing a 10:1 stock split on Friday, retail investors are the real winners here.

“Nvidia specifically is doing this to make its stock more accessible to a wider range of investors. The company’s stock price has risen significantly in recent years, making it difficult for some investors to purchase whole shares. By having a 10:1 stock split, Nvidia will hope to attract more investors and increase the liquidity of its stock.

Are there risks involved?

“There are some risks associated with stock splits. For example, the stock’s price may not recover to the pre-split level, and it may not attract new investors as hoped. Also, there are costs associated with executing a stock split, including administrative and regulatory expenses. Additionally, a stock split can sometimes be interpreted as a sign that a company is struggling to maintain its stock price, although in Nvidia’s case I don’t see that as the case. Amazon and Alphabet have done stock splits in the past and they have of course been successful since.

“In Nvidia’s case, there are both risks and rewards involved. On the one hand, the stock split could help attract new investors and increase the stock’s liquidity. On the other hand, there is no guarantee that the stock price will recover to its pre-split level, and the split could be interpreted as a sign that the company is struggling to maintain its stock price but as mentioned above, I don’t personally see this being the case.

What are the likely implications?

“Before deciding to do a stock split, executives must consider the company’s financial health, the stock’s current price and trading volume, and the potential impact on shareholders. They must also ensure that the split is in the best interest of the company and its shareholders. However, It is worth saying that fundamentally, nothing changes from a macroeconomic perspective.

“The likely outcome of Nvidia’s stock split is that it will make the stock more accessible to a wider range of investors. For retail investors to be able to buy shares at a 10th of the value can seem more attractive, so it wouldn’t be too much of a surprise to see the share price rise in the short term. But again, it is worth saying that nothing fundamentally changes about the company. Overall, the long-term direction of the share price will depend on how well the company performs. Historically, well-performing companies that have conducted stock splits often see continued growth in their stock price, provided they maintain strong operational and financial performance.”