All public companies have a set number of shares that are outstanding. A stock split is an increase in the number of shares from the company by issuing additional shares after a company's board of directors ruling. If a company announces a 4-for-1 stock split, the company will give existing shareholders three additional shares for every initial share that they had. For example, if a company had 10 million shares outstanding before the split, it will have 40 million shares outstanding after a 4-for-1 split. Meanwhile the price of the original share will be divided respectively, i.e. if it was worth $100 prior to the splitting, it would trade at $25 after it. Hence as the number of outstanding shares increases, the price decreases but the company's market value remains constant.
Such actions aim to make a company's share more affordable to retail investors, which will eventually increase liquidity in the stock.
Does it affect the company?
Not really, as the company's market value remains constant. Other than the lower stock price and traditionally a boost of the price after the split, it means nearly nothing for the company, while it means a lot to the investors and to employees, as it makes the shares more affordable to investors while it gives employees more flexibility in how they manage their equity in the company.
But what is key in the Amazon case, is the $10bn buyback! A share buyback, also known as share repurchase, is a corporate action to buy back its own outstanding shares from its existing shareholders, usually at a premium to the prevailing market price. It can be an alternative tax-efficient way to return money to shareholders. Hence three of the main reasons for buybacks are:
- Stock buybacks help companies consolidate ownership.
- When there is market pessimism, companies use buybacks to increase equity value.
- Buybacks can make companies look more financially healthy, attracting more investors.