Amazon stock split may draw retail traders in tough market
After the 20-for-1 split, which was announced earlier this year but took effect Monday, Amazon shares were up 3.1 percent to $126.17 in afternoon trade. They’ve lost 24% year to far, approximately in line with the Nasdaq Composite’s (.IXIC) decline, as increasing interest rates dampen risk appetite and put pressure on shares of high-growth businesses.
While a stock split has no effect on a company’s fundamentals, market participants believe it might assist boost its share price by making it easy for a wider spectrum of investors to acquire the shares.
“Stock splits are definitely correlated with profitable stocks,” said Interactive Brokers’ chief strategist, Steve Sosnick. “The belief persists that stock splits are beneficial. We can argue about whether they are or are not, but if the market believes they are, then they are.
The expectation of the split, according to MKM Partners analysts, has boosted the rise in Amazon shares since May, during which they have trimmed their year-to-date loss by a third.
“While we regard this event as mostly non-fundamental,” MKM’s Rohit Kulkarni said in a note on Monday, “we believe a stock split and potential retail trading strategy might provide an incremental trigger to change sentiment on AMZN shares.”
According to a Cboe analysis issued in May, stock splits may encourage more involvement from retail investors, who, on average, trade in smaller amounts due to their lesser capital, compared to institutional investors.
According to the analysis, which looked at 61 stocks across all market capitalization categories that had split since 2020, the effect was most obvious for stocks with bigger market capitalization.
Retail investors’ ownership of Amazon’s shares has been comparably modest, according to Peng Cheng, head of JPMorgan’s big data and AI strategy, compared to substantial retail activity in the company’s options — an indication that a four-digit share price may have been driving off individual traders.
“It doesn’t feel good psychologically to invest $1,000 and own a third of a share,” he remarked.
Splits “historically are positive” for firms who implement them, according to BofA Global Research, with their shares returning an average of 25% one year later versus 9% for the market overall.
Stock splits may expand the pool of investors who can participate in options, particularly for businesses with significant dollar value, according to experts.
For example, a trader who wanted to bet on Amazon shares growing by 12% by July 1 would have had to spend around $2,900 on Friday. According to Reuters estimates, a bet on the same percentage rise in the shares by July 1 cost nearly $135 on Monday.
Still, options aren’t as powerful in the market as they were last year, when the so-called “bull market” was in full swing.
“This would have been far more combustible a year ago, when individual traders were obsessed with call speculation in a way none of us had seen before,” Sosnick said.
Of course, a stock split will not be enough to overcome the slew of other issues that have sent stocks lower this year, such as concerns about tighter monetary policy and decades-high inflation.
At the same time, according to Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research, the increase of commission-free trading and the introduction of fractional shares have taken away some of the immediate attractiveness of stock splits for investors.
“It’s not nearly as big of an issue as it used to be,” Frederick explained.