Image Source: Pixabay

On June 7th, Magnificent 7 company Nvidia will undergo a stock split after US markets close.

First announced a couple of weeks ago on May 22nd, Nvidia has said that its share price will undergo what is known as a ‘10-for-1’ forward split. But what does that mean?

What is a stock split?

A stock split, like the name suggests, is when a company divides its existing shares into more shares.

For example, in a ‘10-for-1’ forward split, each one existing share is split into ten smaller shares. So, in this case, investors will own ten times more shares than they did before, but each one is reduced to a tenth of its price before the split.

Why do companies undertake stock splits?     

There are many reasons that companies split their stocks, depending on their goals.

One reason why a company that is as large (and expensive to invest in) as Nvidia may do this, is to make its share price more accessible.

To buy one share worth $1210.45 is prohibitive for the average retail investor and even many funds. However, Nvidia shares valued at $121.05, for example, is far more accessible.

If undertaken at a time when a company is trading positively, particularly if they are high-profile, the increased hype and liquidity coming from the split will often produce even more upward momentum.

As now is undoubtedly both Nvidia and AI’s ‘moment’, this will almost certainly be true in this case. Just two days after announcing the split, the Nvidia stock price had already shot up to over a $1000 per share stock price.

Example of a stock split

Let’s say that you are holding 100 stocks in Company A, valued at $3 per share. Then the company announces a stock split at a ratio of 10:1 (10 for 1). This will be a controlled split occurring on a certain, pre-publicized date.

After that ex-date, you no longer have 100 shares trading at $3 per share. Instead, you’ll now own 1000 stocks, valued instead at $0.30 each. So, your investment’s value in Company A remains the same, even though you now have more shares.            

What will happen with the Nvidia stock price when the stock split?

While no one has a crystal ball and can accurately predict what will happen on June 10th, stock prices typically react positively to a 10-for-1 split.

“Some investors believe that a forward stock split is a signal by management to investors that the company believes the stock value is attractive,” says Fidelity.

“It can be the case that a company’s stock price may rise immediately after a stock split announcement (due to this management-signaling effect). There is some evidence that companies who split their stock outperform the broad market over the near term.”

This explains why Nvidia’s stock price hit a new all-time high of $1,224.50 this week.

The newly divided stock will then begin trading at its new price on Monday, June 10th.

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