Stock Splits Explained
Summary
TLDRThis 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
- π Stocks can fluctuate in various ways including going up, down, sideways, or experiencing unexpected events like splits.
- π There are two main types of stock splits: conventional and reverse, each affecting the share count and price differently.
- π° 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.
- π 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.
- π° 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.
- π€ 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.
- π 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.
- β οΈ Stocks that fall below the minimum exchange price risk being delisted, which can prevent them from being traded on the exchange.
- π 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.
- πΌ 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.
- π§ 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.
Outlines
π Stock Splits Explained
This paragraph discusses the concept of stock splits, differentiating between conventional and reverse splits. A conventional stock split increases the number of shares while decreasing the price per share, maintaining the total market capitalization. The example of Apple's 7-for-1 split in 2014 illustrates this, where the share price dropped from $645 to around $92, but the total value of the company remained the same. The paragraph also clarifies that stock splits do not guarantee an increase in stock value and that investors should consider the company's overall financial health. It contrasts this with a reverse stock split, where the number of shares decreases to increase the share price, often to meet exchange listing requirements and avoid delisting. The American International Group (AIG) example in 2009 shows a 1-for-20 reverse split to stabilize its stock price, although the stock continued to fall afterward. The key takeaway is that the value of an investment remains the same post-split.
Mindmap
Keywords
π‘Stock Split
π‘Conventional Stock Split
π‘Reverse Stock Split
π‘Market Capitalization
π‘Liquidity
π‘Outstanding Shares
π‘Share Price
π‘Delisting
π‘Investor Perception
π‘Financial Health
π‘Exchange Listing Requirements
Highlights
Stocks can move in various directions: up, down, or sideways, and may sometimes behave unexpectedly.
There are two types of stock splits: conventional and reverse.
A conventional stock split increases the number of shares while decreasing the price per share, keeping the total value constant.
The analogy of cutting a cake is used to explain how a conventional stock split works.
Apple's stock split in June 2014 as an example of a conventional split, changing from 861 million shares at $645 each to about 6 billion shares at $92 each.
Despite an increase in the number of shares, Apple's market cap remained the same at approximately $555 billion after the split.
Stock splits are typically conducted when share prices are high to make them more accessible to investors.
A lower share price post-split can potentially increase a stock's liquidity by attracting more investors.
The total value of an investor's shares remains unchanged after a stock split.
Investors should not expect a stock's price to automatically increase after a split; additional research is advised.
A reverse stock split is the opposite of a conventional split, reducing the number of shares to increase their price.
Companies may enact a reverse stock split to avoid being delisted from an exchange due to low share prices.
AIG's reverse stock split in July 2009 as an example, changing from 20 shares at $1 each to 1 share at approximately $23.
A higher share price post-reverse split does not guarantee increased investor interest or reduced volatility.
The value of an investment remains the same regardless of whether a stock undergoes a conventional or reverse split.
Transcripts
stocks go up they go down they go
sideways and sometimes they do something
you might not expect they split there
are two types of stock splits
conventional and reverse
a conventional stock split occurs when a
company divides its existing shares into
more shares the number of shares
increases but the price of each share
decreases so the total value of the
company's shares Remains the Same
think of it like cutting a cake cutting
more pieces doesn't mean you have less
cake you just have smaller pieces
for example in June 2014 Apple split
seven for one meaning each share became
seven Apple went from having roughly 861
million outstanding shares at about 645
dollars per share to about 6 billion
shares at about 92 dollars per share
despite there being more shares the
total value of Apple's market cap
remained the same at roughly 555 billion
dollars
a company typically splits its stock
when the price of its shares is high
high prices can make it difficult for
many investors to buy the standard
trading unit of 100 shares ideally a
lower price allows more investors to buy
the stock potentially increasing its
liquidity
so what happens if you own a stock that
splits just like a split doesn't change
the total value of the company shares it
doesn't change the total value of your
shares
let's return to the Apple example if you
had owned one share at 645 dollars
before the split you would have owned
seven shares at around 92 dollars after
the split give or take a few cents when
rounding the numbers the total value of
the shares would still be 645 dollars
one common belief that investors have
regarding stock splits is that a Stock's
price will go up after a split but
splits do not guarantee that a Stock's
value will go up investors should do
additional research and look at the
Stock's overall Financial Health
the opposite of a conventional stock
split is a reverse stock split during a
reverse stock split a company decreases
its number of shares in order to
increase the price of each share
companies often choose to enact a
reverse stock split when shares fall
below the minimum price of the exchange
listing requirements stocks that fall
below the exchange minimum are in danger
of being delisted which means they can't
be traded on the exchange
for instance in July 2009 the center of
the financial crisis the American
International Group or AIG reverse split
its shares one for 20 to stabilize its
stock price
investors who owned 20 shares valued at
about one dollar before the split owned
one share worth roughly 23 dollars after
the split
though AIG hoped that a higher price
would attract investors and reduce
volatility the stock continued to fall
in the end if you own a stock that
splits the value of your investment will
likely remain the same
foreign
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