It may be one of the most popular US stocks across the Selfwealth community, however, shares in Reddit short-squeeze favourite GameStop (NYSE: GME) are about to get a whole lot cheaper.

Fortunately for shareholders, it nothing to do with falling confidence in the company. After all, the stock is still one of the most widely discussed names across the global investment community. Instead, the video game retailer has announced a stock split.

Following in the footsteps of big-name stocks like Tesla (NASDAQ: TSLA), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOGL), GameStop management finally announced the details of the corporate action after its Board gave the green light to plans first detailed earlier this year.

Here is everything you need to know about the GameStop stock split.

Key Details of the GameStop Stock Split

GameStop will split its stock on a four-to-one basis from the close of trade on July 21, 2022, US-time. This is the official split date' for the stock. 

This means that for every one share investors hold in the company, they will receive an additional three GameStop shares. For example, if you currently hold 100 GME shares, you will receive 300 extra shares, making for a total of 400 shares post stock split.

Take note, the record date for this transaction is July 18, 2022, US-time. Investors with GME shares up to this date will be eligible for the additional shares as part of the corporate action. 

The company will then begin trading on a split-adjusted basis from July 22, 2022, US-time.

Like other companies that have conducted stock splits this year, the corporate action will be in the form of a stock dividend'. This does not have any material effect on shareholders, who will still receive shares in the company, as opposed to a cash dividend, and with no tax implications provided cash is not received in lieu of fractional shares - Selfwealth does not offer fractional shares.

For the company, however, a stock dividend results in a key accounting difference. It is able to transfer retained earnings into other accounts under the equity section of its balance sheet.

What is the Impact of GameStop Stock Split?

Although additional shares may sound like a win-win, the impact of the stock split means that the total number of shares on issue will increase by the stock split ratio. 

As a result, and all other things being equal, the share price typically decreases inversely to the stock split ratio. This is because the market capitalisation of the company doesn't change when a stock split takes place. Rather, it is a corporate action that alters the capital structure of the business, but not the fundamentals of the business itself.

Based on a current share price of US$135 per share, as at Tuesday, July 12, 2022, the expected share price of GameStop after the stock split would be one-quarter that price, or US$33.75 per share.

In theory, a stock split does not change the value of a company, only how many shares each investor owns at a lower share price. 

In reality, it not uncommon to see many investors buy shares on news of a stock split. Investors often anticipate, rightly or wrongly, that the lower share price following the stock split will make the stock more appealing to other investors.

When GameStop announced the details of the stock split last week, GME shares gained more than 15% during that trading session.

How does the GameStop Stock Split Impact Short Sellers?

Since the news, some investors have speculated that the stock split may provide the impetus for another short squeeze event. This suggestion has come from the fact that short sellers will be required to buy back four times as many shares when closing out their position after the corporate event.

However, as is the case with long' shareholders, each of the shares in question will be trading at a reduced price that is inversely proportional to the stock split ratio.

In the meantime, over 20% of the company share register is sold short. This in itself will still fuel the fire in terms of any potential short squeeze, albeit the impact of the stock split will have more of a psychological role in the minds of traders and investors than anything.  

Why is GameStop Splitting its Stock?

When the company announced it would be looking at splitting its stock in the form of a stock dividend, management indicated the proposal would provide flexibility for future corporate needs.

With GameStop share register dominated by retail shareholders, the stock split may be viewed as an effort to make the company share price more attractive to both its existing investor fanbase, and new retail investors as well. 

Retail investors are sometimes deterred from investing in stocks with higher prices, so the split could make the stock more appealing given the share price will be trading at a lower level. Stock splits can also boost liquidity, which is a metric followed by many short-term traders.

These perceptions go some way towards explaining why the stock rallied sharply higher on news of the stock split, a phenomenon that has also occurred with other high-profile stock splits in recent times.