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When Alphabet stock split earlier this month, many investors saw their net worth rise rapidly. The 20-for-1 stock split meant that each share of Alphabet, Google’s parent company, was now worth 20 stocks at 1/20 of the price. However, a stock split makes each individual share more affordable to investors. That usually results in more purchases, causing the stock to rise. In the case of Alphabet, the stock rose 9% in aftermarket trading following the split.
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That means individuals who had one share of Alphabet stock at $2,752.88 now had 20 shares, each worth $137.64. But the 9% jump resulted in a gain of more than $15 for each share, or $300 for 20 shares.
But what exactly is a stock split?
As the name implies, a stock split occurs when each share of stock is divided into multiple shares. For each share a stockholder possesses, they will receive additional shares. In the past, stock splits occurred frequently when a stock hit $100. Today, they rarely occur — and usually when a stock price is rising rapidly and reaching territory where it would be unaffordable for many investors.
A four-for-one stock split means that each investor would get three additional shares, each worth one-quarter the price of the original stock. Stock splits can be especially relevant on stocks that pay dividends. In a four-for-one split, for instance, investors who used to receive dividends on one stock would now receive dividends on four stocks.
Stock splits tend not to affect the market capitalization of a company, apart from whatever increase the stock may experience following the split based on more buyers being able to afford shares. S&P 500 stocks tend to gain 5% in the year following a split, with a 2.5% rise occurring immediately, the Wall Street Journal reported.
However, in today’s investment world, where many apps permit investors to purchase fractional shares, splits have lost a lot of their relevance, which is why we don’t see them as often.
When Stocks Split Unevenly
Sometimes, a company will split a stock because of organizational changes within the company. For instance, last Tuesday AT&T announced that it was spinning off its WarnerMedia division and merging the property with Discovery. As part of the company split, AT&T shareholders received 0.24% of a Warner Bros. Discovery stock for each AT&T stock they owned.
AT&T also decided to cut its dividend payments from $2.08 per share to $1.08 per share. As a …….