The stock market is roaring so far in 2024. Both the Nasdaq Composite and S&P 500 have gained approximately 11% thanks to tailwinds in the technology, energy, and pharmaceutical industries.
While steady growth and strong business fundamentals are often correlated with a rising stock price, there are other things that can happen to influence buying and selling activity. More often than not, stock splits lead to abnormal, yet brief, volatility in share prices. Many prominent businesses including Nvidia, Amazon, Alphabet, Tesla, Apple, and Novo Nordisk have completed splits in recent years.
Furthermore, in just the last few months, many businesses in the retail sector have also announced stock splits. Let’s explore why splits occur and how they can affect a stock. Moreover, I’ll explain why I see Costco Wholesale (NASDAQ: COST) as a potential stock split candidate.
Why do stock splits occur?
Stock splits can be a little tough to understand. When a company splits its stock, the number of outstanding shares rises by the number in the proposed split. For example, if a company announced a 3-for-1 split and you owned 100 shares in that company prior to the split, you would own 300 after the split.
At the same time, while the outstanding share count rises by the ratio in the split, the stock price falls by that same factor. Following the example above, let’s say you owned 100 shares at a price point of $30 before the split. Once the split goes into effect, you would own 300 shares but at a price of $10.
Since the share count rises and the stock price decreases by the same ratio, the overall market cap of the company remains unchanged.
Generally, stock splits occur because a company’s share price has risen exponentially. As such, a rising stock price could lead to depressed trading activity as shares seem out of reach for the average investor.
While a stock split does not inherently change the value of the business, many investors will perceive the lower price as an opportunity to buy shares at a better value.
In essence, stock splits theoretically allow a broader base of…
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