When a publicly traded company splits its stock, it is mainly an act of prestidigitation. Nothing actually changes; companies simply flip around some numbers.
GameStop, the primordial meme stock, is executing a 4-for-1 stock split today, July 21. The video game retailer will simply divide its stock price by four, as approved by its shareholders, and multiply each stockholder’s share count by four.
Since nothing changes about the fundamental value of the shares, what leads firms to split their stocks?
Stock splits are back in style
Stock splits, traditionally used to make shares more affordable to more people after a run-up in the price, had largely fallen out of fashion with the rise of no-commission trading and fractional investing. But major tech companies like Amazon, Apple, Google, and Tesla each split their stock in the past two years in an attempt to gin up buying among a growing bloc of retail investors.
Here’s the value prop: Instead of buying one $1,000 share of a stock, an investor might be able to buy two shares of $500 stock or four shares of $250 stock. If the stock split is as dramatic in proportion as Amazon’s 20-to-1 split, which went into effect on June 6, an investor with one share of Amazon stock, once worth $2,785.58, suddenly had 20 shares each worth $139.28. Does it change the value of one’s holdings? Certainly not. Does it feel better having 20 shares rather than one? Possibly.
“The [splitting] company may want to send a signal of confidence that they expect the stock price to continue increasing in the future and hence they feel conformable splitting the shares,” said Efraim Benmelech, a finance professor at Northwestern University’s Kellogg School of Management. The implication is that the share price will keep increasing after the split.
And it works. Stock prices typically rise in the weeks leading up to an announced split. “Although fundamentally nothing changes when a stock split occurs, the increased breadth of possible buyers (especially within the retail community, who have become particularly engaged in recent years) could be a reason for these brief rallies, as well as those hoping to benefit off the back of it,” Lucas Mantle, data scientist at the financial research firm Vanda Research, told Quartz via email.
While GameStop’s stock price is down 5% since its split was announced on March 31, the Dow Jones Industrial Average is down 8% in that time—and GameStop’s stock is up about 35% in the last two weeks, just ahead of the split.
A meme stock splits
In a world of financial parlor tricks, it was only a matter of time that GameStop—which was trading at $158 a share as of July 20 and remains laser-focused on appealing to its retail investor base—pulled this sleight of hand.
As Bloomberg columnist Matt Levine noted: “Options contracts still trade in units of 100 shares, and if you cut the share price by 75% then more people can afford to buy call options, which is the preferred meme-stock way to push the stock up.”
Michael Pachter, analyst at Wedbush Securities, said a split is simply meat for GameStop’s retail army. “That’s the reason,” he told us via email. “Giving unsophisticated retail investors a lower entry point to lose their life savings.”