Nvidia (NASDAQ:) shares fell more than 3% to $117 in early trading on Monday after the company completed a 10-for-1 stock split.
The stock subsequently recovered some of its earlier losses and was down 1% at the time of writing.
Companies often carry out stock splits to lower the price per share and make them more affordable to a greater number of investors. When the price of a stock is excessively high, it can make it difficult for some investors to purchase entire shares.
“Nvidia’s share price has risen sharply in recent years, making it difficult for some investors to purchase entire shares,” comment financial analysts.
“With the 10:1 stock split, Nvidia aims to attract more investors and improve the trading activity of its stock.”
Financial analysts also mentioned that stock splits can carry certain dangers. For example, the share price may not return to its pre-split level and anticipated new investors may not materialize. Additionally, there are administrative and regulatory expenses associated with conducting a stock split.
A stock split can sometimes be misinterpreted as an indication that a company is having difficulty keeping its stock price stable; however, it does not appear that this is the situation for NVDA.
For Nvidia, the stock split is likely to make the company’s shares more affordable to a broader range of investors. Individual investors may find the decline in the share price more attractive, which could lead to a temporary increase in the share price.
“However, it is important to recognize that the fundamental aspects of the company remain unchanged,” add the financial analysts.
“Ultimately, the future trend of the stock price will be determined by the company’s results. Historically, companies that perform well and undergo stock splits typically continue to experience growth in their stock price, assuming that continue to demonstrate solid operational and financial results.”
According to a new report from Goldman analysts, based on 45 stock splits in the Russell 1000 index since 2019, stock prices typically rose 4% in the week following the split announcement. However, the data did not show a consistent pattern in the weeks after or around the date the stock split took effect.
One hypothesis is that stock splits may lead to increased trading activity, although the actual trading volume and trading behavior of individual investors “showed minimal variation after the split was implemented,” as Goldman notes.
“Trading by individual investors increased only marginally, although there were some notable exceptions,” notably with NVDA’s previous split in 2021 and Amazon (NASDAQ:) in 2022.
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