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Video games retailer GameStop announced Thursday that it will ask shareholders to approve a path to a stock split at its annual meeting.
Shares opened Friday 13.4% higher than Thursday’s close. GME has already split once before: 2007 in a ratio of two to one. The stock price was around $50 at the time of this split. It is trading at around $163 today.
If that feels like déjà vu, that’s because it follows a similar stock split announcement from Tesla on Monday. Amazon and Google also recently announced plans to split their shares this summer. Interest in meme stocks GME and AMC has surged since mid-March when their share prices began to rise again.
So when will GameStop split its stock? The date for the AGM has yet to be announced, but historically the meeting is held in June.
What does this stock split mean for investors? Read on to better understand stock splits, how they affect stock prices and options, and what’s next for GameStop.
So what is a stock split?
A stock split essentially makes the stock more accessible and flexible. Stock splits can be in any ratio – some common split ratios are three to one, five to one and 20 to one. On the official day of the split, the number of shares outstanding is multiplied by the split ratio and the value of the share is then adjusted accordingly.
For example, in a three-for-one split, if you held a $210 share on the split date, that would become three shares, each worth $70.
Public companies are bound by the parameters in their articles of incorporation as to how many shares can be outstanding at any given time. If a company wants to increase the number of shares, for example for a stock split or a public offering to raise capital, it needs shareholder approval to do so. After that, the company’s board of directors can vote on whether to go ahead with a stock split. GameStop’s proposed stock split would take the form of a stock dividend, issuing new shares to existing shareholders by a specified date.
Once the stock split occurs, the stock price is lowered, making it more accessible to individual investors and corporate employees with stock compensation plans. The split also provides more financial flexibility for the company.
Note that a stock split is not the same as a stock offering. In a stock split, the issuing company does not raise capital for its own use.
How does a split affect the share price?
In short – pun intended – anything can happen to stock prices in the short term. While we can’t say what this will mean for GME stock, there is some precedent from historical stock split data. Take it with a grain of salt, however, as GME is in a special position on the exchange.
According to a Bank of America study published by Reuters, stocks that are split gain an average of 25% over the following 12 months, compared to a 9% growth for the benchmark indices. However, that additional 16% of growth could be attributed to many other factors besides the split itself, including organic company growth. There is often a lot of trading around splits, leading to volatility both before and after the split itself. For a super volatile stock like GME, the split can create some interesting price action.
What happens to my GME options during a split?
Options are affected just like stocks if they expire after the official split date.
For example, on a five-for-one split, if you hold a call with a $200 strike, it becomes five $40 strike calls. This gives hodlers more flexibility in their strategy: they can now mix and match whether to sell or exercise.
What’s next for GameStop?
The SEC filing states that the stock split is intended to provide “flexibility for future corporate needs.” Also on the AGM vote agenda is an updated compensation plan, referred to as the 2022 Equity Plan. GameStop will issue a proxy statement with further details regarding the voting and the stock plan, as well as the date of the stockholders’ meeting.
Regarding the future of the company, GameStop has announced plans to develop cryptocurrency partnerships and launch an NFT marketplace. We will keep you updated as we learn more about the split and the shareholders’ meeting.
GameStop did not immediately respond to a request for comment.
Continue reading: GameStop Stock Surge Lingo: Here’s What Reddit’s WallStreetBets Vocabulary Means
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