Why are there so many stock splits in 2024? After Nvidia and Walmart, Chipotle Mexican Grill is up this week

This week, the share price for Chipotle Mexican Grill will be reduced by a factor of 50. No, there is not a crisis at the company. As we reported in March, Chipotle announced a 50-for-1 stock split, which will occur after the closing bell tomorrow. When Chipotle’s stock splits (ticker: CMG), its price will go from around $3,200 per share to around $64 per share. (Note: Those estimates are based on CMG’s premarket value as of the time of this writing. The exact prices will be different.)

Chipotle’s stock split is notable because it is the first time the company has split its shares since it went public in January 2006. But the fact that Chipotle is splitting its stock in and of itself isn’t that noteworthy, as plenty of other companies have decided to split their stock in 2024.

The most high-profile of those companies include retail giant Walmart and chipmaker Nvidia, as Fast Company previously reported. And other companies in 2024 have split or announced they will split their stock. As CNBC notes, some of those companies include Williams-Sonoma, Broadcom, and Sony Group.

But why? To answer that, it’s important to understand what a split actually does to a stock and the value of a company.

What does a stock split do?

When a stock splits, its shares are divided by a certain factor, resulting in additional shares. For example, if a stock splits in a 2-for-1 ratio, there will be twice as many shares in the company after the split. If a stock splits 10-for-1, there will be 10 times the number of shares.

Yet these post-split shares don’t retain their previous value. If they did, any company could artificially inflate its market cap just by splitting its shares. Instead, when a stock splits, the value of each share decreases in a commensurate ratio.

For example, if Company A has 1,000 shares of stock valued at $100 each and a market cap of $100,000, and it decides to split its stock 2-for-1, it will have 2,000 shares after the split, but each will be worth only $50. However, the total value of the company will still be $100,000 ($50 x 2,000 shares).

So if a stock split doesn’t change the value of a company, what does it actually do? It makes the cost of buying a single share cheaper.

Institutional versus retail investors

There are two main types of investors: institutional and retail. Institutional investors are entities like big banks and pension funds that buy millions of dollars in shares whenever they scoop up a stock.

Retail investors, on the other hand, are individuals—people like you and me. Retail investors are also colloquially called “mom and pop” investors. They typically buy fewer shares because their funds to buy those shares are limited.

As CNBC notes, institutional investors frequently buy stocks in dollar-value lots: they will buy $20 million of a company’s shares regardless of what the share price is. But retail investors generally buy stock in whole shares—they’ll buy five shares because they can’t afford six.

Because institutional investors buy in dollar-value lots, they really don’t care what the individual share price is when it comes to buying shares. On the other hand, retail investors care very much about individual share prices because their funds are more limited.

Stock splits can make buying into a company more accessible for retail investors

If a retail investor has $1,000 to invest today, they couldn’t buy one whole share of Chipotle based on its current market price of around $3,200 a share. But those same retail investors who have $1,000 to invest will be able to afford to buy around 15 shares of Chipotle stock after the split on Tuesday.

Thus a stock split makes shares more accessible for mom-and-pop investors. Indeed, this increased accessibility for retail investors seems to be driving many of the stock splits in 2024. Walmart cited its stock split as a way to make shares more affordable for its employees to invest in. Nvidia cited a similar reason for its split—“to make stock ownership more accessible to employees and investors.”

And in March, Chipotle said the same thing, with the company’s CFO, Jack Hartung, stating, “we believe this will make our stock more accessible to employees as well as a broader range of investors.”

In other words, so many stocks may be splitting in 2024 because their dollar value is reaching highs that make buying even a single share out of reach for most retail investors. But post-split, those high prices will be much lower, making buying into the company more accessible for the ordinary person.

And while stock splits don’t automatically increase the value of a company, if more retail investors can afford to buy in, it could help send the company’s shares higher over the long run—benefiting the company, too.

When will Chipotle’s stock split take effect?

Chipotle shares will begin trading on a split-adjusted basis on Wednesday, June 26, after the markets open.