Fundamentally, stock splits don't change anything for investors since they merely divide existing shares into more shares, resulting in a lower share price. However, human psychology significantly influences the market's response to stock splits. Investors often perceive these stocks as more affordable, enabling them to buy more shares with the same amount of money. Additionally, there is a common belief that stocks have greater growth potential after a split. These psychological factors contribute to stock splits typically seeing an average total return of 25% in the year following the split, compared to the broader S&P 500 index which has averaged about 12% return in the same period.
Of course, these are just averages. Some split stocks perform poorly as seen with Amazon, Google, Tesla, and Dexcom in the year following their split announcements in 2022.
While past performances do not guarantee future results, they do provide valuable information. Recently, major companies like Netflix and ServiceNow announced stock splits. Individual stocks should remain a small part of a total portfolio, but these are worth considering for a limited portion of an investment strategy due to the historical performance of major stock splits.
Source: BofA Global Research, Yahoo Finance & Business Insider
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