Amazon on Wednesday 3-9-22 announced they are doing a 20-for-1 share split. In the past couple of years some of the prominent companies have announced share splits, in 2020 Tesla and Apple announced a 4-for-1 stock split. To the novice what does a share split even mean?

When you hear of a share split, think of the analogy I am about to present to you. You order a pizza, and you buy it for $10. The whole pizza costs $10. If the pizza is split down the middle, you still have one whole pizza, but cut into two pieces. Each piece can be $5. Let’s say you cut a $10 pizza into four equal slices, if you add up all the slices you still have one whole pizza. At 4 slices a $10 pizza cost $2.50 apiece.

No matter how you cut the pizza, when adding all the slices together, it is one whole pizza worth $10. Apply this concept to the stock market. Each share you can buy and sell represents a piece of paper. A piece of paper that represents ownership. If you have one whole piece of paper, cut it into 20 different pieces, you still have one whole piece of paper, just even sliced into 20 different pieces.

When Apple and Tesla announced a 4-for-1 stock split, they took their overall shares (think of each share as a piece of paper) and cut each piece of paper into four. The outstanding shares then increase by a factor of 4. As a result, because share price = market capitalization / outstanding shares, when stock splits occur, the market capitalization of a company does not change. Market Capitalization stays the same, but the divisor(outstanding shares) went up by 4, so the overall share price decreased by a factor of 4.

Nvidia in 2021 did a 4-for-1 stock split also, the price went from near $1200 down to $300. Google after announcing fourth quarter results in January 2022 said they would do a 20-for-1 stock split. And Amazon on 3-9-22 said they also would join in and do a 20-for-1 stock split

Stock splits do not affect the business, they are just a financial trick used to make their shares more affordable to more investors. If you had bought 1 share of Amazon at $2,000, your overall investment is $2,000 (1 share X $2,000). When a 20-for-1 stock split occurs, you will now own 20 shares, but the price will go down to $100/share. Your overall investment is still the same, 20 shares X $100/share = $2,000 investment.

Remember the pizza analogy, here is another way to think of it. If you bought the pizza and wanted to sell half the pizza for $5, but people can't afford $5 for half a pizza, but more people would buy a quarter of a pizza for $2.50. If you cut the pizza into 8 slices, you can then sell a $10 pizza at $1.25. The smaller you cut the pizza, the smaller the slice, but more people can then afford a slice because the price decreases. That is how stock splits works.