Amazon (NASDAQ: AMZN) stock jumped 5.4% on Thursday following the e-commerce and tech giant's filing on the prior afternoon with the U.S. Securities and Exchange Commission (SEC) stating its intention to split its stock 20-for-1.
For context, the market was down on Thursday, with the S&P 500 and Nasdaq Composite declining 0.4% and 1%, respectively.
Here's what investors should know.
Image source: Amazon.
Amazon stock split details
On March 9, Amazon's board of directors approved the 20-for-1 stock split, according to the SEC filing. As is customary, the split and the required share increase are subject to shareholder approval at the company's annual meeting, which is scheduled for May 25.
If shareholders approve the measure, each shareholder of record at the close of business on May 27 (the "record date") will receive 19 additional shares for every one share they hold as of that date. They'll automatically receive these shares in their account on or about June 3.
Amazon expects trading to begin on a split-adjusted basis on June 6, which is a Monday.
Amazon's board also authorized a new share repurchase program
Before we further explore the planned stock split, investors should know that the company's board of directors also authorized the company to repurchase up to $10 billion of Amazon common stock.
This stock buyback program "replaces the previous $5 billion stock repurchase authorization, approved by the Board of Directors in 2016, under which the Company had repurchased $2.12 billion of its shares," Amazon said in the March 9 SEC filing.
To be clear -- Amazon is currently not buying back any of its shares. The board just put in place a new program so that if and when top management decides to buy back shares, it will be able to immediately do so.
In general, companies repurchase their shares when top management believes shares are undervalued relative to the company's long-term growth prospects.
Do stock splits matter for investors?
Stock splits shouldn't matter too much to investors because they don't change the underlying value of a company or the investor's proportionate stake in the company.
That said, there can be a couple of advantages to a stock split. The biggest one has to do with increasing liquidity and making a stock more accessible to individual investors, or everyday "retail investors."
On Thursday, Amazon stock closed at $2,936.35 per share. No doubt, there are many investors who would like to own Amazon stock but either don't have nearly three grand to invest in it or don't want to invest that much money in just one company. Now, these investors could buy a fraction of one share, but they'd have to use only certain online brokerages. Not all brokerages permit investors to buy -- or sell -- fractional shares. Moreover, some investors just don't like owning fractional shares.
Let's assume Amazon's stock split occurred at the market close on Thursday. In this case, the split-adjusted price per share would be one-twentieth of $2,936.35, or about $146.82. That share price (which shouldn't be too far off the actual split-adjusted price, barring a huge surge or drop in the broader market over the next few months) is likely to increase the number of folks who buy the stock. Indeed, the market agrees, which is why Amazon stock got a bump on Thursday. Oftentimes a stock will give back these post-split announcement bumps, but I think there's a good case to be made that this one could be sustained.
The 20-for-1 stock split could also give Amazon stock a better chance at being included on the Dow Jones Industrial Average, the granddaddy of U.S. stock indexes. This 30-large stock index supposedly reflects the broad U.S. stock market and economy. But it's safe to say that's not been the case for some time because this index generally shuns very high-priced stocks (which have tended to be "big tech stocks") since it's a price-weighted index. In other words, a nearly $3,000 stock like Amazon would have an outsize effect on the index.
Amazon's inclusion in the Dow would bring it to the attention of more individual investors. Moreover, it would also mean that Dow index-based funds would have to buy shares of Amazon. All other things being equal, higher demand for the stock should help increase its price.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
