What Is A Stock Split? (Stock Splits Explained)

we’re going to be talking about stock splits okay stock splits have been in the news lately with

apple announcing a four to one stock split and tesla announcing a five to one stock split

so if you don’t know what that means you’ll learn that in this video however stock splits have actually been around for years

so in this video i’m going to teach you what a stock split is

why do stocks split in general what is the purpose behind them

what is a reverse stock split and then also my thoughts at the end of the video stay tuned okay so what is a stock split a stock split very simply put is when a company

increases its number of shares outstanding by issuing more shares to its current shareholders aka the people that already own the stock so if you want to have a very simple example picture a pizza

right now the pizza has no slices if i go through a stock split

i’m simply just adding more and more and more slices to the pie

the pie still remains the pie but it now has more slices okay

so if you want to talk about a two for one stock split

let’s take a company that has let’s call it one

million shares outstanding and you’re basically doing a two for one two becomes the multiplier you now issue two million shares so instead of eating you know

one slice you’re eating two slices but getting the same

amount of value if that makes sense okay so how does this affect the stock price so let’s say for example we have a company that’s trading at

a hundred dollars a share they go for a two for one stock split

this now takes the number of shares outstanding

multiplies them by two you’re getting two million shares

however the stock price is reduced by two

so in half okay so the market cap actually remains the same

so for those of you that don’t know what market cap is market cap is just number of shares outstanding

multiplied by the share price so say for example in this example

the company’s trading at a hundred bucks a share

let’s just say they have i don’t know 10 shares

their market cap is a thousand dollars makes sense 100 times ten

thousand bucks now if they go for a two for one stock split

okay the number of shares outstanding becomes

twenty however the value is reduced to fifty dollars

it’s still the same it’s still a thousand dollar

market cap so the value of the company is unchanged

and we’ll talk about why stocks split and why they even play these games to begin with

okay so why do stocks split why do companies do this

so very simply it is the perception of affordability okay so this is to make the share price look

more affordable to smaller investors such as the people watching this video and retail investors like myself this is not for wall street this is not for pension funds this is not for institutional investors

this is typically a perception move to make it look more affordable however remember what we just talked about the underlying market cap or the value of the company has not changed okay you’re just creating more slices of one pie

uh the other reason why companies do this is it actually helps increase the liquidity

okay i’m going to talk more about this later i know some of you may be disagreeing with me but basically if a stock price is super super expensive in the days of buying whole shares the liquidity was very low it’s hard to transact that big of an amount for retail investors

now if you make the price the the share price smaller

it’s able to be bought and sold more thus increasing the liquidity of the stock okay

so the perception of affordability actually goes um

up so for example the 100 stock now is trading at 50 oh it looks more affordable however there is a difference between price and value

price is what you pay value is what you get

and at the time of this recording in mid late 2020

a lot of people are forgetting about this facet of investing okay they just look at dips and things like that and say oh i’m buying the dip

you know forget the price uh there’s a big difference between price and value okay but i digress so um number three is what happens post split okay so after these stocks split what typically happens

so top stocks typically go up after the split because the smaller or retail investors that we talked about may actually see the stock price being cheaper or

more affordable when in fact it’s really the same market cap

so we saw this on monday with apple we saw it on monday with tesla both these stocks went up pretty significantly post split

okay and then another reason why the price may actually go up is because people who perceive a company that needs to split their stock

as a company that’s being very successful because the share price keeps going up and up and up

it’s becoming quote unquote unaffordable for retail or smaller investors so people think hey if a stock is splitting that means that the price is going up which means it’s a healthy strong company so i’m going to invest in this company okay

let’s finally get into what a reverse stock split is and then i’ll give my thoughts at the end of the video okay so what is a reverse stock split so this is literally

just the inverse of a traditional split which i explained in the beginning of this video

so why would companies want to do this so typically companies that have a low share price

want to increase the price per share of their stock

so what they do is they reduce the number of shares outstanding so instead of creating more slices

they reduce the number of slices in the pizza or the pie

so why do companies want to do this so basically

they may be perceived as stronger if their share price is higher so kind of like how this

companies doing the stock split want to be perceived as more affordable these companies with lower share prices want to be perceived as

stronger than they actually are even though it only boils back down to total market cap okay and then also some exchanges actually won’t allow you to be listed if your stock price is too low you may become over the counter or pink sheets at that point but that’s another conversation for a different video so

a quick example is a one for two stock split so if you remember

the two for one was taking a million shares turning it into two million this would essentially just be the equivalent of taking a company with two million shares outstanding

and turning it into one for example so that is what we call a

one for two stock split and this would actually increase the stock price say for example

if it was fifty dollars a share at that point it would then become

100 if that makes sense okay so finally my thoughts okay marco’s thoughts six of one or half a dozen what’s the difference there isn’t one so that’s basically what a stock split is you’re either getting

uh six of one thing or half of a dozen six out of twelve

so basically the whole thing that changed the game on these stock splits and it amazes me that

these still these strategies still work to this day okay

the reason i say that is because so many brokers are now offering fractional shares

you have m1 finance which i personally use in my sep ira

you can check that out down in the description below you can sign up for robinhood i use robinhood as well i have fractional investments every day in different stocks and etfs on robinhood as well check that out down below

fractional shares pretty much change the game to where stock splits aren’t necessary because at the end of the day the market cap is the same okay so say for example uh you’re a teenager with the paper route i don’t know if people have paper routes anymore i sound old

and you’re you have very little money in your bank account but you know you want to invest in tesla

at uh 2200 a share okay

and you’re thinking yourself well there’s no way my paper route is going to pay me 2 200 bucks i can’t even own one share of tesla well this is where fractional shares come in

you can buy 0.1 for example and invest 220 and own a tenth of tesla for example however that stock split and so did apple sorted a bunch of other ones but my point is is that in today’s modern technology with fractional shares stock splits are basically a perception play

as opposed to actually meaningfully doing anything

so that’s just my opinion at the end of the day you can still invest in these companies with the same market cap using fractional shares

check out my links below that’s how you support the channel if you haven’t started investing yet check out m1 finance i love it i personally use it check out robinhood i personally use it and they both offer fractional shares thank you so much everybody and have a prosperous day

dude this kid buying tesla with his paper route money

he’s gonna be rich he’s gonna be a millionaire

or he’s going broke.

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