so with the recent news of the apple stock split being a four to one stock split and the tesla stock split being a five to one.
i thought i'd quickly explain what exactly a stock split is and how it's actually going to affect you as an investor in 2022.
that we can quickly go through this information and you can learn something new.
WHAT IS A STOCK SPLIT?
so to start off i want to mention that there are two types of stock splits that you need to be paying attention to.
the first one is called a conventional stock split and this is just the normal kind that we're seeing right now with tesla and apple.
then there's another type of stock split called a reverse stock split and this is more uncommon but it does happen so i'm going to explain how both of these work so you guys can learn something new.
CONVENTIONAL STOCK SPLIT
so with the conventional stock split the way that i want to explain it to you guys is kind of like a pizza.
think of a share of a company as an entire pizza. now what you're going to do is if the company decides that they want to do a stock split the conventional way is that they are actually going to split that pie into more pieces.
for instance apple right now is going with a four to one stock split.
so they're gonna take that pizza that's a hole right now and they're gonna split it into four new pieces.
what this means is that if the share price is a hundred bucks and now you turn it into four new slices then those shares are now going to be worth 25.
it actually looks better to the public because you can get into the stock a lot easier because it's only 25 rather than 100 and this is exactly how it works.
if you wanted to own one share of tesla you're going to be in it over 2 000 and that is a lot of money just to invest in one specific company. because honestly most of us out there when we have a little bit of money to invest it's probably going to be less than 500 bucks.
in this case tesla they're doing a five to one stock split at the end of august and 2020.
because they're trading at over two thousand dollars a share when they do this split it's going to turn it into a five to one like i said and now the shares are going to be 400 apiece which is a lot more affordable as a perceived value.
we all know that 400 dollars sounds a lot less than 2 000 even though the math is exactly the same.
we'll go over how to do the math here in just a minute but i do want to bring up a couple points here.
the first point that i want to mention is the fact that the perceived value meaning the share price does not necessarily mean that it's a good value.
for instance if you guys wanted to buy a bag of doritos and it was 10 bucks we all know that that's a rip-off.
we're used to them being about two bucks. but we all know that you're not going to break the bank if you do buy that bag of doritos for 10 bucks.
it's the same way on the stock market you don't want to just look at the price of a share and determine that that is a good value.
if you find a company that's only five dollars a share versus two hundred dollars a share that has nothing to do with whether or not it's a good value or a bad value.
just keep that in mind because when there's a stock split it does look a little bit better but nothing changes on the back end.
then another point that i want to make is a lot of brokerages out there actually let you invest in what are called fractional shares nowadays. and what this means is that you don't have to buy whole shares of a company in order to invest with them.
traditionally if you wanted to invest in let's say google and they cost over fifteen hundred dollars a share then you're going to have to have at least fifteen hundred dollars to invest in that specific company.
with fractional shares you can start with as little as a dollar so for instance on robinhood i'm pretty sure they have a dollar minimum to invest in fractional shares and also m1 finance another brokerage they have a ten dollar minimum investment.
this means that for as little as a dollar on one brokerage and ten dollars on another brokerage you can invest in a specific company but you don't have to have that much money to start investing with them.
so when it comes to stock splits. stock splits don't really matter if that brokerage offers fractional shares.
obviously you can just get into the company with as little money as you want.
whereas with a normal brokerage account that doesn't allow you to do fractional shares you would want something like a stock split.
that you could actually afford to get into those specific companies. now as far as the math goes when it comes to a stock split if you yourself already own shares of a company and they announce a stock split nothing is going to happen to the value of your portfolio.
you're just going to own more shares and so i'm going to explain exactly how that works really quick so that you guys can make sense of it.
so let's pretend that you own 10 shares of a company and that company's share price is a thousand dollars a piece.
in this case you have a ten thousand dollar investment in your portfolio.
they announce a five to one stock split and what this means for you is that your share price is now going to only be worth two hundred dollars a piece but now you're going to own 50 shares which is still 10 000.
it's exactly the same you just own more shares and that is exactly how it works and that's all you have to worry about.
it's really not going to affect you it just looks a little bit different from an outside perspective.
then one thing that i am in favor of when it comes to stock splits is the fact that there's always going to be a lot of hype around that specific company whenever they announce the split.
for instance there's going to be a lot of investors out there that want to pump more money into that company in hopes that when they have the split they're going to own more shares.
though like i said the math is exactly the same but to them it's a higher perceived value because now they own more shares of that company.
because that happens generally the stock price is going to go up a little bit and that can help you as an investor.
also in the future of the company going forward i think that a stock split is a good idea when they can get those prices down.
for instance if it was 1500 bucks a piece and now it's only 400 bucks a piece.
all those brokerages out there that don't allow fractional shares this is a really good way for more investors to start investing in those specific companies.
i want more people to own that specific company that i'm invested in because that means that the stock price is going to go up.
when it's only 400 versus 1500 it's a lot easier to get in for most investors out there.
like i said most of us probably just have about 500 or less whenever we have a little bit of extra money to invest in.
REVERSE STOCK SPLIT
now a reverse stock split is exactly the opposite as a conventional stock split that i was just talking about so with the reverse stock split what's going to happen is the shares are actually going to go down. so that means if you own 10 shares and they did a two for one then now you'd own five shares of that company but the value of those shares would double so the math is exactly the same.
you have less shares of that specific company.
now when it comes to a reverse stock split the only reason why a company would want to be doing that is because their share prices were falling below the standard requirements of being on the stock market.
for instance if you had a share price of only two bucks and that wasn't meeting the requirements to stay on the market then you would do a reverse stock split.
that you could retire a bunch of shares but you could get the share price to go back up to the level that met those requirements.
that's one of the reasons why a lot of companies decide to do a reverse split.
if a company was trading at only five dollars per share and then the company announced a reverse stock split of five to one.
then what this would mean is that the share price would go up to 25 a piece but there would be five times less shares on the market because those would need to be retired.
in this case it just is a perceived value once again the stock price goes up but nothing on the math end actually changed.
in this case if you had a thousand shares of that company that are worth five dollars a piece then you would have a five thousand dollar investment in your portfolio.
with the reverse split being a five to one you're now only going to have 200 shares of that company but they're going to be worth 25 dollars a piece which is still the 5 000 investment that you originally started with.
like i said earlier the math is exactly the same with the reverse stock split and it's also the same with the conventional stock split you just have to look at it a different way.
So this was all about Stock split, what they are & how they works. We also explained 2 different kind of splits like Conventional & Reverse.