What Happens if I Buy Amazon Before the Stock Split? | Personal Finance

Amazon‘s (NASDAQ: AMZN) much-anticipated stock split may finally take place this year. On Wednesday, March 9, the tech giant filed a Form 8-K with the Securities and Exchange Commission (SEC) and the stock price soared. Amazon notified investors about plans for a 20-for-1 stock split — the first in over two decades. If you own shares of Amazon, you’ll be the recipient of 19 extra shares for every one share in your account after the stock split.

Here are a few things to consider before you dive in.

Image source: Getty Images.

What you should know about Amazon’s stock split

Amazon’s board of directors approved a 20-for-1 stock split that’s slated to take place on June 3. However, nothing is set in stone until shareholders give Amazon the green light at the company’s annual meeting on May 25.

If all goes as planned, shareholders on record as of May 27 will be granted 19 additional shares for every one share they own. That means if you have two shares of Amazon in your account now, you’ll have 40 shares after the split.

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Receiving additional shares in your account may sound like a sweet deal if you’ve been eyeing Amazon’s stock for a while. But a stock split in itself won’t make your wallet fatter. It just allows more people to gain access to a full share of Amazon stock at a cheaper price. You can think of it like exchanging a $20 bill for 20 singles. That transaction didn’t make you richer; you just walked away with the same amount of money cut up in bite-sized pieces.

Is now a good time to buy Amazon’s stock?

A stock split shouldn’t be the only reason you buy a stock. Although Apple and Tesla‘s stock performed well after their stock splits in 2020, you can’t always count on extreme growth with every stock. You need to focus on the underlying business to determine the company’s future potential.

Before you gobble up shares of Amazon, here are some questions that will help you determine if the company deserves a spot in your portfolio:

  • What is the company’s competitive advantage?
  • Do you notice trends in earnings growth?
  • How effective is the executive team?
  • How has this company performed during downturns?
  • Does this company have the potential to be around in the next 10 years?

You can use this information to develop your investment thesis. If you have a change of heart about Amazon’s stock after the split, you can return to your investment thesis to remind yourself why you believe this company could deliver profitable results over the long term.

You want to buy shares of Amazon. Now what?

If you decide to pull the trigger and add Amazon to your portfolio, you should think about which account you want to buy it in. You can take advantage of tax-advantaged retirement accounts or brokerage accounts.

Let’s say you decide to buy shares of Amazon in your Roth IRA (individual retirement account). If you buy two whole shares for $3,000, you’ll have 40 shares of Amazon in your account after the stock split. You can sell some of the shares without having to worry about taxes. You won’t be penalized unless you withdraw your gains in your Roth IRA before you turn 59 1/2, unless you qualify for an exception.

But if you buy Amazon in a taxable brokerage account, you could be on the hook for higher tax rates if you sell too soon. Anytime you sell investments that you’ve held for a year or less, you’ll pay the same tax rates that you pay on your earned income you receive at work. You can fix that problem by holding your investments over a year and taking advantage of long-term capital gains rates. Those rates can be 0%, 15%, or 20% for the average investor. Below are the 2022 capital gains tax rates based on your taxable income.

Single Filer Taxable Income

Married Joint Filers Taxable Income

Head of Household Taxable Income

Long-Term Capital Gains Rate

$0 to $41,675

$0 to $83,350

$0 to $55,800

0%

$41,676 to $459,750

$83,351 to $517,200

$55,801 to $488,500

15%

Over $459,750

Over $517,200

Over $488,500

20%

Get ready for the split

Before you invest your hard-earned money in any company, you should know what you are signing up for. Do your homework and make decisions based on your goals, risk tolerance, and age. If Amazon passes your buy test, you can scoop up shares before the stock split and watch your shares multiply after the stock split.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlene Rhinehart, CPA owns Amazon, Apple, and Tesla. The Motley Fool owns and recommends Amazon, Apple, and Tesla. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Christopher Lewis

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