Unlocking the Secrets of Stock Splits
What You Need to Know
Stock splits are a hot topic in the investment community, and for good reason. When a company decides to split its stock, it can lead to increased trading activity and a perceived increase in affordability for investors. But what exactly happens during a stock split, and how can it impact your investments?
The Mechanics of a Stock Split
When a company announces a stock split, it will also share a crucial ratio with investors. For instance, a 10-for-1 split means the outstanding share count will rise by a factor of 10, while the stock price is reduced by the same factor. This means the valuation of the business remains unchanged, but investors may perceive the lower share price as more affordable.
The Impact on Investors
After a split, stocks tend to witness greater demand, resulting in the share price continuing to gain. Ironically, this means investors may end up paying for the stock at a higher valuation post-split than before. Take Netflix, for example, which has split its stock twice since going public. The last split was in July 2015, and since then, the stock has risen by more than tenfold.
A Potential Candidate for a Stock Split
Netflix’s stock price has soared by 86% in 2024, almost triple the gains witnessed in the S&P 500 and Nasdaq Composite. As the stock inches toward an all-time high, some investors may be seeking alternatives in the media and entertainment space due to the pricey nature of Netflix. Considering the recent valuation expansion, I wouldn’t be surprised if management opts for a stock split in the near term.
Diversification and Growth
Netflix’s expansion into live sports events and its upcoming immersive-experiences project, Netflix House, demonstrate the company’s efforts to diversify its platform beyond producing original content and licensing popular syndicated shows and movies. Regardless of whether or not a split occurs, I believe Netflix remains a great opportunity for long-term investors to buy and hold.
Don’t Miss Out on the Next Big Opportunity
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