What is a stock split? What Alphabet’s 20-to-1 split means for you

Alphabet announced this week that its board has approved a 20-to-1 stock split, meaning shares of Google’s parent company will soon trade at a much cheaper price.

The news – which came during a huge earnings report where the company reported 32% revenue growth – helped push the stock up 7.5% in Wednesday’s trading. The company’s value has more than doubled since May 2020, and it’s now worth just under $2 trillion.

It is the latest stock split in Silicon Valley, following Apple and Tesla, which in recent years have both split their shares as their valuations soar. Here’s what you need to know about stock splits and how Alphabet’s decision will impact investors.

What exactly is a stock split?

Simply put, a stock split is when a company divides its shares to lower the price and increase the total number of shares available. A company usually undergoes a stock split when its stock price has become very high.

If a company whose shares cost $1,000 apiece suffered a 2-for-1 stock split, the total number of shares would double while the price of each share would drop to $500. An investor who owns 100 shares of this shell company would still have $100,000 worth of shares, but would own 200 shares instead.

Why did Alphabet split its shares?

At nearly $3,000 per share, Alphabet has one of the most expensive stocks in Silicon Valley. The company’s chief financial officer, Ruth Porat, said the move will allow more people to invest in the company.

“The reason for the split is to make our stocks more accessible,” she said on a conference call Tuesday. “We thought it made sense to do that.”

Analysts have also speculated that the move could bring Alphabet shares into the Dow Jones Industrial Average, which they are currently not a part of due to their high price. Entering the index could help boost the stock’s value because it would force all funds that hold the Dow Jones to buy Alphabet shares.

“This could be the move that gets Google into the Dow Jones Index,” Wedbush Securities analyst Dan Ives told CNBC Make It. “It would be a positive impact on the stock, because being part of this flagship index would lead to index purchases by investors.”

Will the stock split affect the value of the existing shares?

Yes and no. Although the new price is around $150 per share – at Alphabet’s Wednesday closing price of $2,960 – existing shareholders will receive 19 additional shares for each share they already own.

This means that an investor who owned 100 shares will now own 2,000, but the total value of their stake will remain the same.

When will the stock split take effect?

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