On Monday April 11th, 2022, the Canadian e-commerce giant Shopify announced a 10-for-1 stock split of its class A and class B shares. But what does this mean?
Let’s break down stock splits.
What Is a Stock Split?
Think of it this way: you can cut a pizza into eight slices instead of four. But the pizza pie is still worth the same no matter how many slices you cut it into. The eight slices of pizza instead of four is essentially a stock split.
Shopify’s class A and class B shares that are outstanding - meaning that are held by existing shareholders - will undergo a stock split. Through this process, the number of class A and class B shares outstanding will increase. In this case, Shopify announced a 10-for-1 split: so each 1 share of Class A and Class B shares becomes 10 shares, 1 existing one, and 9 additional shares.
By increasing the number of shares that are outstanding, the price of each share will decrease but Shopify’s total dollar value of all shares outstanding will remain the same. This is the overall pizza pie, if you will, that is still worth the same even though there are more slices of pizza, or shares. Understandably, investors are more comfortable purchasing 100 shares of a $10 stock rather than 1 share of a $1000 stock.
Why Would a Company Decide To Do a Stock Split?
A stock split is usually a sign that a company is thriving. However, it becomes more expensive for investors to purchase shares as the value of the company increases. A company will decide to split its stock without affecting its overall market value to reduce the price of each individual share.
In Shopify’s case, its revenue surged after the pandemic forced businesses to go online, sending their value soaring. In its last earnings report in February, Shopify said that it nearly tripled revenue and doubled the number of merchants using Shopify compared to their 2019 levels.
What Happens When a Stock You Own Gets Split?
There’s little impact on the shares owned by a shareholder that undergo a stock split. The number of shares owned as a percentage of the overall shares of the corporation will remain the same. While the shareholder will receive more shares, each individual share will represent a smaller percentage of the outstanding shares.
A Shopify shareholder that holds 1 share will own 10 shares after the stock split. And every other shareholder’s position will be similarly adjusted in accordance with the number of class A and/or class B shares owned.
Is a Stock Split Only for Publicly Traded Companies?
Privately-held companies as well as publicly traded companies can do a stock split if it makes sense for them. For example, before going public, Google Inc. made two separate 2-for-1 stock splits. The board of directors of a privately held company can decide to do a stock split if the share value of the company increases, though this is more common with public companies.
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.