The curious thing about stock splits 🔪

Your share of the pizza doesn't get bigger. But the pizza often outperforms. 🍕

Splitting a stock is like slicing a pizza. (Source: Pexels)

Walmart recently announced it would conduct a 3-for-1 stock split.

Starting on Feb. 26, Walmart will trade on the post-split basis. So, for example, if you owned one share of Walmart and it closed at $180 before the split, after the split you would have three shares worth $60 each. Technically, your share of the company would be unchanged.

Theoretically, a stock split does not reflect any change in the underlying company’s fundamentals. Chase has a pretty good brief explainer on stock splits. I enjoyed their analogy:

Think of it like this: when you cut a pizza into smaller pieces, the size of each piece is smaller, but the total amount of the pizza pie and the value of the entire pie do not change. The same is true about the value of a company when a stock split takes place.

Maybe you can take this analogy further and say that in the same way smaller slices of pizza are easier to eat, stocks with lower share prices may be easier to trade. But this take has become less relevant because many brokerages now offer fractional share trading in many stocks.

One idea I think has some merit is that a stock split reflects management’s conviction in the fundamental prospects of their company, which could arguably boost the market value in the coming months, quarters, and years.