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Comment by midasuni | Hacker News Reader

If you own 10 at 2000 or it splits 10:1 and you own 100 at 200, what difference does the split make?

(Obviously you can buy and sell smaller units but aside from that)

Retail traders that started "investing" in the last two years have been trained to believe that stock splits means a bunch of money will pile in because the price looks cheaper. Obviously there has never been a correlation there and even less so now with the wide availability of fractional shares.

I heard it might also mean that it can then be added to the dow index which might trigger some automatic buying?

I'd expect that to be negligible because the size of funds Google is already part of (QQQ, VTI, SPY, etc. etc.) are orders of magnitude larger than ETFs that track the Dow (DIA is the only one that comes to mind).

The Dow itself is a bit of gimmick in that its value is the sum of all the prices of the stocks in the index. Meaning if Google joins at $120 but kicks out a stock that was $300 then the Dow would go down 180 points.

No, it wouldn't. The Dow is weighted for exactly this reason: https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average#C...

It also allows options trading by retail investors (options are traded in 100 share tranches, which for GOOG or AMZN right now means your minimum option trade is on an underlying value of ~$250K, meaning a 5-10% swing is... significant.). Splits make options trading more accessible to retail investors by dropping the minimum risk 10-20x which also might cause a natural demand increase.

> Obviously there has never been a correlation there and even less so now with the wide availability of fractional shares.

Splits have historically caused price bumps, so I think this isn't true.

Recent research in behavioral econ actually supports that a lower price on the ticker leads to more retail investor buy-in. I forget who, but it was a Yale professor who wrote a paper on this in the 2010s -- she gave a talk at D.E. Shaw back when I was an undergrad visiting for a summer program.

I guess all I want to say is that it's more nuanced than 'obvious' and is probably an active debate right now for economists, but I wouldn't know more exact details.

> Retail traders that started "investing" in the last two years have been trained to believe that stock splits means a bunch of money will pile in because the price looks cheaper

I have heard this exact thing debated since the late 80's, so I'm not sure what the last two years has to do with it. The fact is, whether there's a real effect there or not depends less on the precise math of the situation and a whole lot of behavioral and psychological factors. Splits goosing the stock price is a real thing that happens. It may be entirely self-perpetuating crowd-mind BS but it does still happen.

Retail has easier access to options & day trading now than in the 80's.

Stock split results in much cheaper options, which many retail day traders seem to prefer.

I might argue that a stock split to a cheaper price would increase your volatility due to the above. Though TSLA's current price might disagree with me as I think it's one of the most traded & is by no means cheap for options trading.

maybe you should get off the high horse and do some research as to the factors that could lead the stock price goes up during splits - not going to list it here due to your condescending tone

It shouldn't. But historically there was a lot of research that said that it did--admittedly many from a time when buying fractional shares was harder/costlier.

So, there is one notable way in which splits can have a practical impact on trading: options (and credit to Matt Levine for mentioning this recently). Options trading is still limited to blocks of 100. A split reduces the cost of those contracts.

I do wonder, with the relatively recent availability of fractional share ownership, if the effect of splits will be more muted in the future as retail is no longer limited to whole share purchases. But who knows, there's also a psychological aspect to this that's hard to account for.

My finance classes are at least partly a few decades out of date :-)

Another reason that I recall is that (presumably) if a company does a split, it indicates that management is confident in the future--and a reverse split presumably indicates the opposite.

>I do wonder, with the relatively recent availability of fractional share ownership, if the effect of splits will be more muted in the future

Certainly, we've seen share prices of a fair number of companies recently that would have been considered well out of "normal" ranges historically.

Another: brings in more retail traders who base their decisions on the price of the stock

If you can increase demand for a finite supply, the price increases. The bet on a stock split is that the existing price was a psychological barrier for retail investors and thus the split will bring in more retail investors.

Lower share prices will increase demand from small accounts. Today there are many accounts that can't afford to rationally hold even 1 share of GOOG.

But don't fractional shares eliminate this limitation?

As pointed out elsewhere, options trading deals in lots of 100 shares, so the table stakes are very high for GOOG options right now. A split will open that up to many more traders. But also, even though they're not exactly exotic, not every brokerage account lets you trade fractional shares still. Mine don't, for example.

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