Stock Splits Explained

Summary

This script explains the concept of stock splits, highlighting two types: conventional and reverse. A conventional split increases the number of shares while decreasing their price, maintaining the company's total market value. Apple's 7-for-1 split in 2014 exemplifies this, where the market cap remained constant despite more shares at a lower price. Conversely, a reverse split raises share prices by reducing the number of shares, often to avoid delisting due to low prices. AIG's 1-for-20 reverse split in 2009 aimed to stabilize its stock price but did not prevent further decline. The script clarifies that stock splits do not guarantee value increase, urging investors to consider a stock's overall financial health.

Takeaways

• 📈 Stocks can fluctuate in various ways including going up, down, sideways, or experiencing unexpected events like splits.
• 🔄 There are two main types of stock splits: conventional and reverse, each affecting the share count and price differently.
• 🍰 A conventional stock split increases the number of shares while decreasing the price per share, keeping the total market value constant, similar to cutting a cake into smaller pieces.
• 📊 Apple's example in 2014 illustrates a 7-for-1 split, increasing the number of shares from about 861 million to approximately 6 billion, with the market cap remaining around $555 billion.
• 💰 Companies typically opt for a stock split when share prices are high to make the stock more accessible to a broader range of investors and potentially boost liquidity.
• 🤔 Contrary to a common belief, stock splits do not inherently guarantee an increase in a stock's value post-split; investors should consider the company's overall financial health.
• 🔄 In a reverse stock split, the company reduces the number of shares to increase the price per share, often as a response to falling below exchange listing price requirements.
• ⚠️ Stocks that fall below the minimum exchange price risk being delisted, which can prevent them from being traded on the exchange.
• 📉 The American International Group (AIG) performed a 1-for-20 reverse split in 2009 during the financial crisis to stabilize its stock price, but the stock continued to decline.
• 💼 The value of an investor's holdings remains the same after a stock split, as the total value of the company's shares does not change, only the number of shares and their individual prices are altered.
• 🧐 Investors should conduct additional research and not rely solely on the occurrence of a stock split as an indicator of future stock performance.

Q & A

What are the two types of stock splits mentioned in the script?

The two types of stock splits mentioned are conventional and reverse stock splits.

What happens during a conventional stock split?

A conventional stock split occurs when a company divides its existing shares into more shares, increasing the number of shares while decreasing the price of each share, keeping the total value of the company's shares the same.

Can you provide an example of a conventional stock split from the script?

An example given is Apple's stock split in June 2014, which was a seven-for-one split, reducing the share price from about $645 to around $92 while increasing the number of shares.

Why do companies typically decide to split their stock?

Companies typically split their stock when the share price is high to make it more accessible for investors, potentially increasing the stock's liquidity.

How does the total value of a company's market cap remain the same after a stock split?

The total value of a company's market cap remains the same after a stock split because the increase in the number of shares is offset by the decrease in the price per share.

What is the effect on an individual investor's shares during a stock split?

The total value of an individual investor's shares remains the same after a stock split, as the increase in the number of shares is balanced by the decrease in the price per share.

Is there a common misconception about stock splits mentioned in the script?

Yes, a common misconception is that a stock's price will go up after a split, but the script clarifies that splits do not guarantee an increase in the stock's value.

What is a reverse stock split and why is it used?

A reverse stock split is when a company decreases its number of shares to increase the price of each share, often used to meet minimum exchange listing requirements or to avoid being delisted.

Can you provide an example of a reverse stock split from the script?

An example is the American International Group (AIG) which performed a one-for-20 reverse stock split in July 2009 to stabilize its stock price during the financial crisis.

What was the outcome for AIG after the reverse stock split in terms of investor attraction and stock volatility?

Despite the reverse stock split, AIG's stock continued to fall, indicating that a higher share price did not necessarily attract investors or reduce volatility.

What is the general effect on an investor's investment value if they own a stock that undergoes a split?

The value of an investor's investment will likely remain the same after a stock split, as the changes in the number of shares and their price per share balance each other out.