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Consider Nvidia — they are splitting their stock 4:1 through a stock dividend. What was preventing someone from buying a share before ex dividend, holding it past the record date and selling, only to receive 3 new shares on the payout date? Why wouldn’t instead the price fall to counteract this? It seems like an easy way to make 75%. Instead Nvidia traded higher in this time? What am I missing?

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4 Answers 4

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That's not how splits (or dividends) work. If you own one share of stock worth $100 and it does a 4-1 split, you will (eventually) have 4 shares worth $25 each. Anyone who buys stock before the split is effective gets the $100 shares; anyone who buys shares after the split is effective gets $25 shares. There's no arbitrage opportunity.

Same for a dividend. If your $100 stock pays a $5 dividend, after you the dividend is effective you will have stock that's worth $95 and (eventually) $5 in cash. Again, there's no arbitrage opportunity. Either you get $100 stock and a dividend or $95 and no dividend. (There are timing differences between when the dividend is announced, effective, and paid, but that's not germane to the arbitrage question).

Stock dividends have the same dilutive effect on the original shares, so a "3 share" dividend is the same as a 4-1 split from the shareholder's perspective. The original share represents a fourth of the ownership that it did, so they are worth 1/4 of their original value, with the other 3/4 "given" back to you in the form of additional shares.

The difference between a stock dividend and a stock split is that with a stock dividend, the _company pays cash for the new shares. So instead of just splitting the ownership into smaller pieces, the company uses cash to provide additional pieces to its owners. One benefit of this is that owners will benefit from future growth, versus a cash dividend where the cash is completely out the door.

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  • So between the record date and the payout date if you buy a share, how does that translate to holding the same value post split if you don’t get the dividend? I’m wondering about the mechanics. Is the price of your share just never adjusted down?
    – Joe
    Jun 30, 2021 at 14:02
  • Suppose there's a company worth $100 per share and it announces a $5 dividend. If you buy the stock before the record date you pay $100 to get the stock and get a $5 dividend, which leaves you with a $95 stock. If you buy after the record date you pay $95 for the stock and get no dividend. So your ending wealth is the same in either scenario. You have $95 less cash and a $95 stock.
    – D Stanley
    Jun 30, 2021 at 14:05
  • I understand that for the monetary dividend. I think my confusion comes with the price adjustment post split. If I buy a share at $100 between the record date and the split date, after the split date will that price not be marked down to $50 (in a 1:2 split)? If you don’t get the share dividend (2 new shares worth 50 each) how will the old value be reflected in my brokerage account? Is my price never adjusted?
    – Joe
    Jun 30, 2021 at 14:11
  • You won't buy a share for $100 after the record date. Before the record date you'll pay $100 for shares and get a second share eventually, ending up with 2 $50 shares. After the record date you should pay $50 for the shares and you won't get a dividend (stock or cash). How the broker reflects that I'm not certain, but there's no "free money", no profit, and thus no immediate tax effect.
    – D Stanley
    Jun 30, 2021 at 14:14
  • Your shares don't actually split. Instead, you receive new shares to bring your total count up to 4x your holding on the record date. If you sell any shares between the record date and the split date, your broker forwards the corresponding new shares to the new owner. Only on the morning of the split date, once all parties have received the new shares they are entitled to, is the price adjusted to be 25% of the previous night's closing price. (1/2)
    – chepner
    Jun 30, 2021 at 20:37
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As in most cases of splits, the stock price history is adjusted to the new stock volume and this avoids dramatic movements in the stock price.

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  • How does this answer the question? The OP is not asking about "stock price history".
    – Flux
    Jun 30, 2021 at 7:45
  • @flux the title suggests so. The OP thinks that the stock price didn't move, it did. The historical price was updated with the new number of shares.
    – Stian
    Jun 30, 2021 at 8:55
  • This misses the mark a little bit- see my comment to mhoran below.
    – Joe
    Jun 30, 2021 at 12:54
  • This answer explains how historical data is adjusted due to a stock split in order to maintain price continuity. This has nothing to do with the OP's question. Jun 30, 2021 at 13:27
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Selling shares between the record date and the distribution date also sells the right to claim the special dividend that was afforded to the owner on the date of record. If you buy shares during this period you also participate in the split.

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If just before the split was announced you had 10 shares and the price was $100 per share, then your investment was worth $1,000.

If shortly after the split was announced it started going up and at the key moment of the split it was worth $120 per share your investment would be worth $1,200.

Just after the key moment you would now have 40 shares and they would be worth $30 per share. You investment would be worth $1,200. the number of shares is multiplied by 4 and the price is divided by 4. The splitting event doesn't change the worth of any investors investment.

This is covered in the NVIDIA 2021 Stock Split Frequently Asked Questions:

What is a four-for-one stock split in the form of a stock dividend?

A stock dividend is a common way to implement a stock split. On the distribution date, holders of the company’s common stock will receive three shares for each share they hold as of the record date. The result will be a stock split where what was once one share is now four shares, and the trading price will be divided by four.

Splitting doesn't make investors rich. It is the movement because of the announcement, and the belief that it is a good thing that increases the value of the investment. Buying between the announcement and the key moment allows some current investors to cash out, or people who buy quickly to make a profit during the short time they own the shares.

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  • Thanks for the response. I understand that- and I know that the split doesn’t affect the value of the company. My question is more along the lines of timing of buys and sells though to take advantage of the dividend. It could also be looked at by asking why anyone would buy the shares after the record date and before the split goes into effect- they would pay full price and immediately have the value slashed upon the split date as they don’t receive the dividend.
    – Joe
    Jun 30, 2021 at 12:52
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    Let's ignore share price movement before and after the split as well as the details about record date, ex-date and pay date. If a $100 stock splits 4 for one, if you own 100 shares (worth $10k), when it splits, you end up with 400 shares at $25, also worth $10k. The simple answer is that if you pay the pre split price, you participate in the split. If you pay the post split price, you do not participate. There are no free lunches. Jul 1, 2021 at 13:43

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