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Amazon.com Inc. (AMZN) became the second company to hit $1 trillion in market value on Sept. 4, 2018, close on the heels of Apple Inc., which achieved this feat in early August. But in the 20-plus years since its initial public offering (IPO), Amazon stock was not always the hot commodity that it is today. When Amazon first went public in 1997, its stock was priced at just $18 per share.
From that modest beginning, the online retail giant has seen its stock skyrocket, despite a rocky period during the dot-com crash. The company’s shares hit a new high of $2,050.50 a share on Sept 4, 2018, before dipping to $1,870.32 on Oct. 10.
If you had invested just $100 in Amazon’s IPO in 1997, you would have received 5 shares. What is beyond impressive is that investment would have been worth nearly $120,762 at the Aug. 31, 2018, close price of $2012.71/sh. That would yield an increase of more than 120,000% on the initial $100 investment.
It is clear from the figures above that even a modest investment in the company in 1997 would have turned into a healthy contribution to anyone’s retirement savings. In fact, with the new high of $2,050.50, the share price had grown more than 11,200% since its IPO.
To make sense of how a modest $100 investment can grow into such a hefty amount, it helps to understand the mathematics behind one of the most powerful facets of stock market investing: the split.
Stock Splits: The Basics
A stock split occurs when a company decides to issue additional shares to current shareholders in accordance with the number of shares already owned. A 2:1 split means shareholders receive an additional share for every share they already own. An investor who owns 100 shares, for example, ends up with 200 shares. Stock splits can be as generous as the company that issues them wishes, but 2:1 or 3:1 ratios are most common.
When a stock splits, its price is reduced by the same factor. A 2:1 split means shareholders have twice the number of shares valued at half the price so the total value of the shares remains stable. A 3:1 split means the stock price is reduced to one-third of the original value.
Companies may announce a split for numerous reasons, chief among them being the desire to keep stock attractively priced for investors, and arguably more liquid.
While the price of a share is initially reduced by a split, the value — or market capitalization — does not change much. What has changed is that an investor who used to own one share now has two or three depending on the split factor.
Amazon Does the Splits
Amazon’s stock split three times in quick succession: once in 1998 and twice in 1999.
The company announced its first stock split in June 1998, offering two shares for every one share held. That means the five shares an investment of $100 in the IPO would have bought now grows to 10 shares. The next one came just a few months later, a 3-for-1 stock split in early January 1999. That would mean that the if you sold no shares, you would now own (10×3) 30 shares. Subsequently, Amazon announced another 2-for-1 split in September 1999, increasing your share ownership to 60 Amazon shares.
As of the close on Aug. 31, 2018, those 60 shares would have been worth $120,762, an increase of a whopping 120,662% over the initial $100 investment.
Investing in IPOs
Investing in stocks or IPOs requires the use of a broker account. A stockbroker provides access to stocks and IPOs. Some brokerage firms require investors to meet certain criteria or qualifications before being allowed to invest in an IPO. While there is a possibility of impressive gains like with Amazon’s story, IPOs are highly speculative and unproven. Investopedia’s list of the best online brokers can help those looking to invest get a start.
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