For the past several months, investors have been wondering if Nvidia (NASDAQ: NVDA) would launch a stock split. That’s after the technology giant’s stock soared in recent years, reaching nearly $1,000. And it actually did reach $1,000 this week in the trading session following Nvidia’s earnings report and announcement of a stock split. After the split, the chip designer’s shares will be trading at a much lower level.
But this move won’t change Nvidia’s $2.3 trillion market value. Instead, a stock split involves issuing more shares to current shareholders and this will result in more shares trading at a lower price; current shareholders will end up with the same dollar value of stock as they had before the split. The drop in price will make the stock accessible to a broader range of investors, and Nvidia even said as part of its announcement that this was its motivation for making the move.
So, today, as Nvidia takes the step many investors were waiting for, is it time to buy the shares?
Image source: Getty Images.
Why are investors interested in stock splits?
It’s important to note that it’s not a good idea to buy a stock just because the company launched a split — it’s simply a mechanical operation. A stock split itself won’t push a stock’s value higher or lower. So now you might ask, if that’s the case, why are investors so interested in whether a company will split its stock?
In many cases, the move suggests a company is optimistic about its future and believes that its shares have what it takes to take off once again. Generally, the company has performed well from an earnings perspective in recent years, and this has prompted the stock price gains we’ve already seen. Now, by splitting its shares, a company is implying that those gains aren’t over, and from the stock’s lower price it once again may soar and even eventually return to its pre-split level.
Now let’s consider the Nvidia operation, a 10-for-1 stock split, effective June 7. This means that if you hold one Nvidia share today, post-split you’ll own 10, but the value of your holding will remain the same….
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