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Jim Cramer explains why stock splits can bring gains

Scott Mlyn | CNBC
  • CNBC's Jim Cramer explained why Nvidia's 10-for-1 stock split last week can give companies a boost.
  • A stock split doesn't materially change the value of an investment, rather it just means a company is dividing its shares in such a way that each individual share is cheaper.

Using Nvidia's announcement last week of its 10-for-1 stock split as an example, CNBC's Jim Cramer explained why such moves can give companies a boost.

"In theory, stock splits, they shouldn't matter at all," he said. "But if you just look at the stock splits that've been announced … they clearly don't hurt."

A stock split doesn't materially change the value of an investment, rather it means that a company is dividing its shares in such a way that each individual share is cheaper. For example, Nvidia closed Tuesday at $1,139.01. With a 10-for-1 split based on that price, each share would be worth $113.90. And an investor who owned one share of Nvidia before the split would now own 10.

Cramer explained that companies usually split stock to make shares with "terrifying price tags" more available to regular investors. Even though trading in fractional shares is possible, Cramer said it can feel better for many to be able to own full ones. Nvidia said in a press release it would issue the split to "make stock ownership more accessible to employees and investors."

While Cramer stressed that stock spits don't guarantee gains, he said a company's shares often do rise after such an announcement. He gave several examples of companies whose shares have run after a split, including the "most eye popping" one of the year from Chipotle, which split stock 50-for-1, as well as those from Walmart, Cintas and Lam Research.

"In a rational world … splits shouldn't matter at all, they're not value creators," he said. "But we don't live in a rational world, and that's why splits do matter."

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Disclaimer The CNBC Investing Club Charitable Trust holds shares of Nvidia.

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