Save and Invest

Google parent Alphabet announced a 20-for-1 stock split. Here's what that means and how it will impact investors

Sean Gallup | Getty Images News | Getty Images

Alphabet this week announced that its board approved a 20-for-1 stock split, meaning that shares of the Google parent company will soon be trading at a much cheaper price.

The news — which arrived during a massive earnings report where the company reported revenue growth of 32% — helped send the stock up 7.5% during Wednesday trading. The company's value has more than doubled since May 2020, and it is now worth just shy of $2 trillion.

It's the latest stock split in Silicon Valley, following Apple and Tesla, which in recent years both split their stocks as their valuations skyrocketed. Here's what you need to know about stock splits, and how Alphabet's move will impact investors.

What exactly is a stock split?

Put simply, a stock split is when a company divides up its shares to lower the price and increase the overall amount of shares available. A company usually undergoes a stock split when the price of its shares has gotten very high.

If a company whose shares cost $1,000 apiece underwent a 2-for-1 stock split, the overall amount of shares would double while the price of each share would drop to $500. An investor who owns 100 shares in this fictional company would still have $100,000 worth of stock, but would own 200 shares instead.

Why did Alphabet split its stock?

At nearly $3,000 per share, Alphabet has one of the priciest stocks in Silicon Valley. The company's chief financial officer Ruth Porat indicated that the move will allow more people to invest in the company.

"The reason for the split is to make our shares more accessible," she said on a Tuesday conference call. "We thought it made sense to do."

Analysts have also speculated that the move could get Alphabet's stock into the Dow Jones Industrial Average, which it is not currently a part of due to its high price. Entry into the index could help increase the stock's value as it would require all the funds that own the Dow to buy Alphabet shares.

"This could be the move that gets Google into the Dow Jones index," Wedbush Securities analyst Dan Ives tells CNBC Make It. "This would be a positive impact to the stock as being part of this flagship index would cause index buying from investors."

Will the stock split affect the value of existing shares?

Yes and no. Though the new price will be roughly $150 per share — as of Alphabet's Wednesday closing price of $2,960 — existing shareholders will receive 19 additional shares for every share they already own.

This means that an investor who owned 100 shares will now own 2,000, but the total value of their holding will remain the same.

When will the stock split go into effect?

Following approval by shareholders, owners of Alphabet stock will receive their additional shares on Friday, July 15. Alphabet will begin trading under its new price when markets reopen on July 18.

Sign up now: Get smarter about your money and career with our weekly newsletter

Don't miss: 3 ways parents can make their kids smarter with money, according to a CPA

How this 31-year-old earns and spends $120,000 a year in Sunnyvale, CA
How this 31-year-old earns and spends $120,000 a year in Sunnyvale, CA