Understanding Stock Splits - Nvidia

Welcome to Finance Friday.

Nvidia (NVDA) will undergo a stock split today (7th June 2024). Who is Nvidia, what is a stock split, what are the advantages and what does it mean for retail investors like us?

Who is Nvidia?

Nvidia, a leading American technology company, is known for creating graphics processing units (GPUs) for gaming and professional applications. They also develop artificial intelligence (AI) hardware and software, processors for mobile devices and vehicles, and software tools for scientific computing. Founded in 1993, Nvidia has become a major player in the tech industry, influencing computer graphics, AI development, and more.

In the last 12 months, Nvidia’s stock price has increased from around 200$ per share to nearly 1,200$ per share. This surge is largely driven by the demand for their powerful Artificial Intelligence chips.

This week, Nvidia overtook Apple and became the world’s second most valuable company. Both companies have a market capitalisation of around 3 trillion dollars. Microsoft remains the world’s most valuable company with a market capitalisation of 3.15 trillion dollars.

What is a Stock Split?

When a company’s share price rises significantly the board of directors often consider a stock split. A stock split is where the companies issue more shares to existing shareholders in a fixed ratio.

A stock split itself doesn't directly change the value of a company or your investment in it. It's more like cutting a pizza into more slices - you still have the same amount of pizza, it's just divided differently.

For example, if a company has a share price of 100$ and performs a 2-1 stock split the shareholder would receive two 50$ shares for every 100$ share they own.

The Nvidia stock split is 10-1 meaning that shareholders will receive 10 times the number of shares each worth one-tenth of the price.

The stock split will occur after the close of trading on Friday 7th June. The markets will reopen on Monday 10th June with the revised number of shares.

Advantages of a Stock Split

Some potential benefits can come from a stock split:

• Increased Liquidity: By splitting the stock and lowering the price per share, it can become more attractive to a wider range of investors, especially smaller ones. This can lead to more frequent trading. More shares available for buying and selling is ‘increased liquidity’.

• Psychological Appeal: A lower share price can make the stock seem more affordable and accessible to individual investors, even if the total value of their investment stays the same. This can boost investor sentiment towards the company.

• Positive Perception: A stock split can sometimes be seen as a sign of confidence from management in the company's future prospects, which can give the stock price a temporary boost.

It's important to remember that a stock split is a financial manoeuvre, not a signal of a company's actual performance.

How does this affect Retail Investors?

Some retail investors may take the opportunity to sell part of their holdings. For instance, a retail investor who only has 1 Nvidia share will have 10 shares and can sell 5, if they so choose.

Other retail investors might decide to buy Nvidia shares now if previously they could not afford the asking price of over 1,000$ a share.

It should be noted that with some brokers, buying and selling fractional shares is possible. Fractional shares allow investors to purchase portions of a share, making expensive stocks more accessible even before a split.

Word of the Day: Liquidity

Liquidity - noun - the ease of converting an asset into cash without affecting its price.

Most well-known shares such as Apple tend to be very liquid because there are always plenty of buyers and sellers at the market price.

Property such as houses are not very liquid. It usually takes a long time to sell a house at the market price. If you want to sell it quickly, you may have to accept a lower offer.

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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