What Is a Stock Split? What Does Nvidia Stock Split Mean for Canadian Investors?

Nvidia, the largest US stock market capitalization, split its stock 10-for-1 in early June. Now, investors are wondering how the shares will perform.

The company’s stock has surged since the beginning of 2024, largely driven by the increasing interest in artificial intelligence, an area where Nvidia excels. This stock split aims to make shares more affordable. So, what does this mean for investors?

What is a stock split?

A stock split is when a company increases the number of its shares by dividing each existing share into multiple new shares.

For example, in a 2-for-1 stock split, one share becomes two shares, and the value of each share is halved. This makes the stock more affordable and attractive to a broader range of investors, without changing the overall value of the company.

Nvidia's 10-for-1 stock split

To illustrate how a stock split works, let's take Nvidia's latest stock split as an example. Here’s a detailed breakdown of what happened:

Pre-split scenario

• Share price: Nvidia's stock was trading at $1200 per share before the split.

• Number of shares: Suppose you owned 10 shares of Nvidia.

• Total Value: Your total investment would be 10 shares * $1200 = $12,000.

Post-split scenario

• Share price: After the 10-for-1 stock split, the share price would be divided by 10. So, the new share price would be $1200/10 = $120 per share.

• Number of shares: You would now own 10 * 10 = 100 shares.

• Total value: Your total investment remains the same: 100 shares * $120/share = $12,000.

Why did Nvidia split its stocks?

Nvidia $NVIDIA(NVDA.US)$ decided to split its stock primarily to make its shares more affordable and appealing to retail investors. Here are the key reasons behind the stock split:

• Increased accessibility for retail investors

One of the primary motivations for Nvidia's stock split is to make its shares more accessible to retail investors.

By reducing the share price, Nvidia aims to attract a broader range of individual investors who might have been deterred by the higher price of a single share. This increased accessibility can lead to greater market participation and investment in the company.

• Enhanced liquidity

A lower share price often results in increased trading volumes. Higher liquidity makes it easier for investors to buy and sell shares, which can reduce the bid-ask spread and improve overall market efficiency. Enhanced liquidity is beneficial for both existing shareholders and potential investors, as it facilitates smoother transactions.

• Reduced volatility of the share

The stock split can attract new investors. Broader market participation can lead to more diversified ownership, helping stabilize the stock price and reduce volatility. This diversified investor base can provide a more stable platform for future growth.

• Psychological appeal to investors

Lower-priced shares can have a psychological appeal, making investors feel they are getting more value for their money. This perception can drive increased demand for the stock, potentially leading to a higher overall market valuation.

• Alignment with growth trajectory

Nvidia has been experiencing significant growth, and the stock split can be seen as a vote of confidence in its future prospects. By making the stock more accessible, Nvidia can capitalize on its momentum and attract more investors who believe in its growth potential. This alignment with the company's growth trajectory can further enhance investor confidence.

• Increased potential of inclusion in indexes

Lower share prices can make it easier for stocks to be included in certain indexes, which may have specific share price criteria. Inclusion in popular indexes can boost demand for the stock, as index funds and ETFs adjust their holdings to mirror the index composition. This inclusion can provide additional liquidity and investor interest.

Nvidia stock split history

Nvidia stock has undergone six stock splits. These splits demonstrate Nvidia's strategy to enhance market liquidity and make its shares more accessible to investors. To illustrate the impact, one NVDA share purchased before June 27, 2000, is now equivalent to 480 shares.

Will investors see bigger gains after Nvidia' stock split?

Forward stock splits are often associated with successful companies whose share prices have risen substantially. When management announces a stock split, it can be perceived as a strong signal that the company’s business model is thriving and rewarding its shareholders. This perception can lead some investors to trade the stock in anticipation of further gains. For instance, Nvidia's stock closed 9.4% higher after announcing a recent share split, reflecting investor enthusiasm about the company's outlook.

However, it's important to understand that stock splits themselves do not change a company’s intrinsic value. Investors should not expect capital gains merely because of a split; if it worked that way, struggling companies could simply announce stock splits to artificially boost their poorly performing shares.

Looking ahead, the performance of Nvidia's stock post split will largely depend on the company’s ability to continue to innovate, to foster strong demand for products, and to maintain its market share.

Investors should consider these underlying strengths rather than the stock split alone when evaluating potential gains.

What does Nvidia’s stock split mean for Canadian investors?

For Canadian investors, Nvidia's stock split could be a double-edged sword. On one hand, a lower share price post split makes it more accessible, potentially attracting a broader investor base and increasing market liquidity. On the other hand, being at the top performance could mean that the company has limited room for further explosive growth. It’s crucial to understand that a slowdown in earnings or a miss of the expected growth rates could lead to share price corrections.

Beyond the stock price, you should evaluate key metrics such as the Price-to-Earnings Growth (PEG) ratio, and consider how this investment aligns with your overall asset allocation, risk tolerance, and long-term financial goals. By taking a holistic approach and considering these factors, you can make a more informed decision about whether Nvidia fits into your investment strategy.

Nvidia stock 12 months forecast

Following an extensive evaluation of NVIDIA's financial data, revenue, and stock trends over the last few quarters by more than 40 third-party financial analysts, NVDA Stock has been given a "Strong Buy" rating. Analysts forecast an average stock price of $136.210 (Average) for the next 12 months.

Nvidia stock forecast