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🔔 The Psychology of a Stock Split

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Alphabet Stock Split Aimed at Bringing Google Shares to Masses [BBG]

Alphabet (Google) announced a 20:1 stock split last night.

“The reason for the split is it makes our shares more accessible,”

Bloomberg reports that the tech giants are aiming to entice the numerous small investors who have flocked to the stock market during the pandemic.

See, these poor retail investors can't afford to buy a single share at $2,700+, so the shares need to be cheaper for them to participate otherwise they'll miss out...

In a logical, rational world none of that makes sense.

Retail investors have already embraced fractional share trading...

BBG October 2020

And back in the pandemic heyday, retail investors had no problems jumping on Robinhood to buy and sell their fractional shares (and/or options).

There's no real barrier to participate here.

Is it purely psychological?

If Mom & Pop 🤢 (hate that term) have $2,000 laying around to invest, do they really look at Google's share price(s) and think they can't afford to buy One Google because it's too expensive?

Sadly, that's probably the case. Price perception is real.

The 'customer' shopping for some shares sees $2,700 per share and instinctively thinks one of a few things:

  • I can't afford that (I only have $2,000)

  • I can't even buy a whole one (understands fractional, perceives poor value)

  • My $2,000 buys 0.74% of a ($2,700) share in one of the largest, most successful businesses in the world. I'll invest and add more over time. (rational, logical Homo economicus)

With the stock split, Google would trade around $138 per share.

The prospective investor doesn't need to think twice...

$2,000 buys them 14.49 shares in Google.

The only question is if they buy 14 or grab another $70 from elsewhere and round up to a nice, even 15 shares of Google.

Financially, nothing has changed. The monetary value of those 14.49 shares is the same as the 0.74% fraction of the single share.

But 14.49 is higher than 0.74 so the price/value perception changes.

Then there's the Dow...

...the difference between capitalization-weighted indices such as the S&P 500 Index (SPX) and price-weighted indices like the Dow Jones Industrial Average (DJIA)

While a cap-weighted index derives its performance from the movement of the underlying holdings multiplied by their respective allocations as determined by market cap, the Dow Jones Industrial Average is a price-weighted index, which simply means that stocks with the highest share price receive the greatest weighting in the index.

High-priced companies can't get into the DJIA because of this price-weighting mechanism. Simply, the high stock prices would overwhelm the entire index.

When Apple split their stock back in 2020, their weighting in the Dow fell from 10% to 2.7%.

Now the speculation surrounding Amazon will pick up. If Google and Amazon were incorporated into the Dow, tech would even dominate the Boomer Index. Millennial Takeover complete.

One of the major plus points for Google has been the increase in cloud business. This is definitely an area to monitor across all of the tech firms.

Growth in cloud computing, servers and everything related is being closely scrutinised. As the world becomes more virtual this trend is expected to continue.

Microsoft's Azure prospects were a key driver of the volatile trading seen post-earnings. Initially the price spiked lower amid disappointment before recovering those gains after reassurances on the earnings call and opening higher the following day.

AMD also saw after-hour gains on stronger than expected chip demand for data centre servers:

Amazon report earnings tomorrow. While AWS is a smaller percentage of total revenues, it's a higher margin area of the business.

There's even speculation that an Amazon Prime price increase is on the cards. Strong growth in web services and the prospect of higher Prime revenues would surely be well-recieved by the market.

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