When a private company decides to go public, it issues an initial public offering (IPO). These are a set of shares the company sells for the first time on the primary, public market. After the IPO is complete, the company's shares then trade on the secondary market to the general public. In order to take advantage of an IPO, you need to have a broker account. But that's not all. Some firms require that investors meet certain criteria before being allowed to invest in an IPO.
IPOs have become a hot commodity, drawing a lot of attention from the media as well as from investors. Names like Facebook and Chinese e-retailer Ali Baba have helped some investors generate pretty attractive returns. Amazon is among those names as well, especially when you consider the company's stock history from its meager beginnings to how far it's come up to now.
- An initial $100 investment in Amazon would have given an investor five shares during the company's IPO priced at $18 per share.
- Amazon shares hit a high of $2,185.10 during intraday trading on Feb. 19, 2020.
- The company's stock split three times—two two-for-one splits in 1998 and 1999, and a three-for-one split in 1999.
- That original $100 investment would translate to $129,186 with 60 shares as of Feb. 20, 2020, at a closing price of $2,153.10 per share.
Amazon: An Overview
Amazon (AMZN) is, by far, the most well-known online retailer in the world. The company was founded in 1994 by Jeff Bezos, who originally ran it out of his garage. It's now become one of the world's leading influential companies, and also runs web and cloud computing services, along with artificial intelligence operations.
It became the second company to hit $1 trillion in market value on Sept. 4, 2018, close on the heels of Apple, 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 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 stock has reached the four-digit mark, hitting a new high of $2,185.10 per share on Feb. 19, 2020, during intraday trading.
If you invested a simple $100 in Amazon's IPO in 1997, you would have received five shares. That investment would have been worth $129,186 at the end of the trading day on Feb. 20, 2020, when shares closed at $2,153.10 each. That would yield an increase of more than 129,000% on the initial $100 investment.
Initial public offerings allow companies to raise capital from public investors.
It's clear from these figures 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 $2,185.10, the share price grew almost 12,040% 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 the most common are 2:1 or 3:1 ratios.
When a stock splits, its price is reduced by the same factor. So 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. On the other hand, a 3:1 split means the stock price is reduced to one-third of the original value. While the price of a share is initially reduced by a split, the value—or market capitalization—does not change much. What does change, though, is that an investor who used to own one share now has two or three depending on the split factor.
Companies may announce a split for numerous reasons. The primary reason, though, is the desire to keep stock attractively priced for investors. When a company's stock reaches lofty levels like Amazon's stock, it becomes harder for investors to afford, especially new ones. The other reason is to make the stock much more liquid, and therefore, increase the number of outstanding shares.
Amazon Does the Splits
Amazon's stock split three times in quick succession. The first split was announced in June 1998. For its first stock split, Amazon offered two shares for every one share held. That means your hypothetical original investment of $100 in the IPO would have gone from five to 10 shares.
The next two stock splits Amazon announced were in January 1999 and then in September of the same year. The first of these two was a three-for-one split. That would mean that if you held onto all your shares, you would now own 30 shares—10 from the original split multiplied three times. The next was another two-for-one split, which would have increased your ownership to 60 Amazon shares.
As noted above—and not to rub any salt in your wounds—those 60 shares would be worth $129,186 at the end of the trading day on Feb. 20, 2020. Remember, that's more than 129,000% on the initial $100 investment.
The Bottom Line
While there is a possibility of impressive gains like with Amazon's story, IPOs are highly speculative and unproven. Not all companies have an IPO that can guarantee you riches. But if you're still interested, be sure to check out Investopedia's list of the best online brokers. Many of them can help those looking to invest get a start.