The most significant news of this financial quarter would be the announcement of a 1:10 stock split plan for "the most important stock on the planet"-$NVIDIA (NVDA.US)$Announce the 1:10 stock split plan.

Since the announcement of the stock split on May 23, Nvidia has surged by more than 20% in only 7 trading days. The stock price has reached as high as $1,150, and the market cap has approached that of Apple. Nvidia's stock price has risen by more than 130% so far this year.

Many investors are curious why Nvidia decided to split their stocks, when it will be completed, and how it will affect its stock price. Who could be next?

Here are the five key points for the mooer community to understand the impact of Nvidia's stock split.

First, what is a stock split? Why is Nvidia choosing to split its stocks?

A stock split, also known as a stock dividend, means that a listed company splits its shares into several shares.

Nvidia has officially announced a 1:10 stock split plan, which will be implemented when the market opens on Monday, June 10. Nvidia shareholders will receive an additional 9 shares of common stock after the market closes on June 7, Friday. As of the close of business on June 6th, for each common share, shareholders will receive an extra 9 shares.

Simply put, if an investor owns 100 shares of Nvidia stock before the split, they will own 1,000 shares after the split. The new stock price will be one-tenth of the original stock price.

So, why did Nvidia choose to split its stocks 1:10? Companies typically split their stocks when the stock price has risen substantially, in order to adjust the stock price and attract investors who previously could not afford to buy stocks.

Second, what impact does the stock split have on investors? What impact does it have on options?

For Nvidia, the split lowers the price per share to one-tenth of the previous price, with the result being a lowered investment threshold. This means that more small-scale investors will be able to enter the market. Additionally, the increase in dividends may attract investors who seek dividend income, resulting in significantly increased liquidity of the stock. It's worth noting that even though the number of shares has increased, the stock split will not change the company's total market cap or the total equity of shareholders. However, it may affect investors' perception of the company and investment decisions.

Furthermore, the stock split will not affect the existence or operation of options. The Options Clearing Corporation (OCC) will take care of everything, with the goal of ensuring that the split does not affect the value of option contracts.

During this stock split, options will also be split proportionally like the stocks. Specifically, after the split, the number of option contracts in your hands will become ten times the original number, and the exercise price of each contract will become one-tenth of the original. In essence, it's like turning one voucher into ten vouchers, with each voucher having one-tenth of the original purchasing power. Nevertheless, the amount of cake you can buy before or after the stock split is essentially the same.

In this stock split, both options and stocks are split in proportion.

Specifically, after the stock split, the number of option contracts in your hand will become ten times the original, while the exercise price per contract will become one-tenth of the original.

Like other aspects of the stock split, options will be split proportionally. Specifically, after splitting the stock, the number of option contracts in your hands will become ten times the original number, and the exercise price of each contract will become one-tenth of the original price. In essence, it's like turning one voucher into ten vouchers, with each voucher having one-tenth of the original purchasing power. Nevertheless, the amount of cake you can buy before or after the stock split is essentially the same.

What should you pay attention to when trading options after stock split?

1. Changes in liquidity:

After a stock split, new option contracts usually have better liquidity. This means that if you plan to trade options, it's best to choose new option contracts because they are easier to buy and sell. Also, since new options are contracts after the stock split, the option price will be relatively lower, making the post-stock split price more friendly.

For old option contracts, their trading value may decrease unless you plan to exercise them, especially for out-of-the-money options.

If you hold old contracts, you can consider rolling over the options:

That is, close the old contracts and open new ones to avoid issues with low liquidity.

2. If you hold a covered call option combination, pay attention to margin:

If you hold a covered call option combination, it is highly likely that it will be split after the company's actions, leading to an increase in account margin requirements.

For your option combination position, you can choose the following market operation to prevent account risk caused by the combination being split:

a. Timing to close the option short position in the combination and re-hedge after capital adjustment;

b. On the basis of the currently hedged stock, increase part of the long stock position;

c. Temporarily do not trade in the market, observe the account status after the company's actions, and then make decisions.

3. What impact will the stock split have on stocks? Has the stock price risen or fallen in previous stock splits?

Nvidia's stock split is expected and could be a catalyst for its continued rise.

Stock splits are usually seen as a reflection of the management's confidence in the company's share price and future growth prospects, which may increase expectations in the market and further push up the stock price.

In addition, for Nvidia, another advantage of this stock split is that it is expected to make it easier to be included in the Dow Jones Industrial Average, the oldest blue-chip stock index on Wall Street.

Nvidia has undergone five stock splits in history. From the previous trends of the stock splits, Nvidia is expected to experience a strong upward trend from the announcement of the stock split to the formal stock split period.

However, the stock price performance on the day of the stock split was relatively average. Of course, in the history of Nvidia's stock price, this is just a small wave. The last stock split was in July 2021, and as of the latest, Nvidia's stock price has risen by more than 490%.

What is exciting is that the stock price of tech giants has generally risen in the long term after each stock split.

Four, will the "Nvidia Effect" appear again? These stocks may be affected.

Since last year, whether it is chip stocks or public utility stocks, as long as they are related to Nvidia, the stock price increase has been very significant.

Therefore, the trend of Nvidia's stock price after the split also closely affects the subsequent development of this ecosystem.

Five, will Nvidia's 1-for-10 split become a model, and who will be next?

Bank of America previously believed that Nvidia's stock split may trigger a wave of stock splits in the US stock market.

The bank said that 36 S&P 500 index constituent stocks, including Broadcom, Netflix and Super Micro Computer, whose stock prices are above $500, are all possible candidates for the US stock split.

However, it is worth noting that although the liquidity and demand of a stock usually increase after a stock split, which is usually beneficial for stock price increases, the performance of the fundamentals of the company is also crucial. With excellent performance and strong stock price trends, stock splits can garner more investor attention and investment interest and attract more funds into the market to realize the advantages of stock splits.

Mooers,

Do you think Nvidia can continue to rise after the stock split?

Feel free to leave your thoughts in the comments section~

Editor/Somer