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Why is Shopify pursuing a stock split?

Yesterday, Shopify [SHOP] announced that it will undergo a 10-for-1 stock split, pending board approval. If approved, investors will receive nine additional Class A shares or Class B shares for every one share held after the close of business on 28 June.

This article was originally written by MyWallSt. Read more insights from the MyWallSt team here.

The $76bn Canadian ecommerce company reported the decision alongside a move to seek shareholder approval for a “founder share” for its CEO Tobi Lütke, which would increase his voting power.

What does a stock split mean for shareholders?

Not much, really. In short, when a stock splits, the share price goes down and the number of shares goes up. If Shopify splits 10-for-1, a holding of 100 shares at $600 a piece becomes a holding of 1,000 shares at $60 a piece. Splits make stocks more liquid and more affordable for everyday investors.

Considering the steep price of individual shares in Shopify — $617.38 at market close yesterday — the thoughtful folks running Shopify made a decision to split shares 10-for-1. So, in this example, the company valuation won’t change, but individual share price will. However, now there are more shares on the market, making it even easier for people to buy and sell them.

During a split, the value of the company never changes, but it makes the company look more affordable to small investors — and they start buying. This can boost demand and drive up the share price for a short time following the split.

What’s more, Shopify is also seeking to green-light and issue a new class of non-transferable founder shares to CEO and founder Tobi Lütke, giving the executive a total voting power of 40% when combined with his existing Class B shares.

The move would be a massive vote of confidence in favour of the founder and CEO, and we’ll be interested to see how investors feel, which is why we asked MyWallSt analyst Michael O’Mahony for his thoughts yesterday, which you can read here with a free MyWallSt account.

 

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