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Here are 5 things smart investors should know about Nvidia’s 10-for-1 stock split
Nvidia is expected to undergo a 10-for-1 stock split this week.
There is undoubtedly no more attractive name in artificial intelligence (AI) than Nvidia (NVDA 5.16%). From 60 Minutes specials, financial news programming speakers, and headlines across the Internet, Nvidia is everywhere.
There’s so much being covered about the company that it’s hard to keep up. A recent Nvidia update is the company’s next 10 for 1 stock split.
Let’s explore how stock splits work and how they can impact your decision to invest in a company.
1. How do stock splits work?
During a stock split, the value of a company outstanding shares increase by the factor indicated in the division ratio. At the same time, the company share price is reduced in the same proportion.
At the time of writing, Nvidia has approximately 2.5 billion shares outstanding and trading for $1,145. If the split happened today, the number of Nvidia shares would increase 10-fold – resulting in about 25 billion shares. Furthermore, its share price would be around $114.
Given this dynamic, stock splits do not change a company’s performance. market value.
Image source: Getty Images
2. Why is Nvidia splitting its shares?
In general, capital markets have performed quite strongly over the last 18 months. Since January 2023, the S&P 500 rose 37%, while the Nasdaq Composite returned almost 60%. Much of this performance can be attributed to optimistic sentiment around AI.
When it comes to AI, Nvidia is at the forefront of the technology industry’s next big wave. Nvidia shares are up more than 680% since January 2023 and are up about 130% so far in 2024.
Given the sharp price increase over a relatively short period of time, Nvidia shares can be considered expensive. Stock splits often occur when management wants to make shares more accessible to a broader base, especially retail investors.
But as I mentioned, stock splits don’t actually change a company’s market value. So the lower post-split stock price doesn’t mean you’re actually investing in Nvidia at a more attractive price. In fact, this rarely happens and I will explain why.
3. How are stock splits handled?
One of the most convenient aspects of a stock split is that investors are not required to do anything. Investment firms and brokers take care of the details behind the scenes.
Let’s say you own 10 shares of Nvidia at a price average price of US$1,000. After the stock split, your brokerage account will reflect that you now own 100 Nvidia shares, each with a base cost of $100.
4. Has Nvidia split its shares before?
Nvidia has split its shares five times in the past; the most recent was a 4-for-1 split in July 2021.
Since Nvidia’s last split about three years ago, shares have risen sixfold.
5. Should you buy Nvidia stock before or after the split?
Investors spend a lot of time debating when to buy and when to sell a stock. The inconvenient answer is that there is never a perfect time to do this. However, there are a few things to watch out for when it comes to stock splits.
In general, split stocks experience some volatility in the days following the split. Investors perceive the split-adjusted price as cheaper, so they start investing.
This psychological tendency often opens the door for day traders, who take advantage of the impulse and quickly dispose of inventory to make a quick profit. Furthermore, this increase in purchasing activity actually pushes assessment higher – meaning you are buying shares at a more expensive price compared to before the split.
This dynamic can be seen in the graph in the previous section. You can see that for a short period after the split, the stock price briefly melted down – only to fall thereafter.
Then, you should invest in Nvidia before the split? In my opinion, the exact timing of your investment is not very important. Spending time in the market is more important than trying to time the market.
Investors must maintain a long-term time horizon when it comes to growth opportunities, like AI and Nvidia specifically. Monitoring a company’s progress from a sales and profitability perspective over many years is critical to generating outsized returns for your portfolio.
Considering AI is in its infancy and Nvidia’s potential in the technology domain in general, I see the stock as an attractive opportunity regardless of whether you invest before or after the split.