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So they were going to be talking about a stock split so i had somebody reach out to me and asked me about a reverse stock split and they wanted me to basically explain what exactly that was and to be honest with you until somebody mentioned that to me i wasn’t even really aware that that was something that existed but it’s very funny because coincidentally about
A week and a half later one of the stocks that i’m invested in announced a reverse stock split now this isn’t the video on the reverse stock split i decided to do both do a video on a stock split or a forward stock split as well as a reverse stock split so this is going to be a video on a traditional stock split or a forward stock split and i’m going to be doing
The video on the reverse one as well i’m sure i’ll upload that either tomorrow or it’s already uploaded so make sure you guys check that out but anyway so let’s talk a stock split now as an investor when you hear about a stock split you get very excited even people who don’t know a lot about investing they tend to know that a stock split is a very good sign for
A stock so basically here’s what happens you have your board of directors and they come to the conclusion that okay the stock price is too high we need to split the stock up generally at that point they’re going to put it to a shareholder vote if you have voting rights with the shares that you have they’re going to send around a basically a proxy tabloid that
You’re going to actually sit down and vote on and basically at that point you’re going to vote whether or not you agree with the stock split if the vote passes they will then take shares of the stock and for every share you have they will split it in a certain ratio so maybe it’s a two to one split where forever sure you have you now get two shares or it could be
A five to one split where you get five shares per share you had and that’s not uncommon to see one of the biggest stock splits that people talk about is the apple stock split i believe there’s was a six to one stock split so basically the stock price was trading in the it was a six to seven hundred dollar range when they finally split it up and they split it six
To one so everybody who had one share of apple stock after that split they had six shares so you can see splits that are not just a two to one split you can see five to one six two one splits so it’s not uncommon to see multiple shares issued for your individual share instead of just so basically a stock split is a decision by the company’s board of directors to
Increase the number of outstanding shares by issuing more shares to current shareholders and as you guys know or maybe you don’t outstanding shares is simply the number of shares held by all investors both public and private evils like the institutional investors so it’s all the shares available on both publicly and privately of that company so basically the thing
That people don’t understand there one of the major misconceptions with a stock split is that the actual value of the stock changes many people look at a stock unfortunately and they look at the price of a stock and they determine whether or not it’s a expensive stock or a cheap stock based on that stock price the only real way to tell whether or not a stock is
A value is to look at the price to earnings ratio and compare it to other price to earnings ratios of stocks within that sector that’s really the only good way to value or basically determine whether a stock is expensive or cheap you can’t look at a share price and determine whether or not the stock is expensive or cheap or a good buy or a basically overvalued so
No value is added or subtracted during a stock split basically market capitalization which is equal to the number of outstanding shares times the price per share can never change during a split whether it’s a reverse split or a forward stock split so i have a couple of examples here just to demonstrate how this is actually accounted for in the price per share now
These numbers make no sense i just basically threw them in here for easy math but let’s say this company has a market capitalization of $10,000 and let’s say they currently have 1,000 shares at $10 per share now the board of directors they basically decided okay that’s way too expensive which gotta – that isn’t but just for numbers sake they said that that’s too
Expensive they can’t charge $10 per share of that stock so what they do is they do a two-to-one split so at that point every person who has a share they now have two shares so now we have 2,000 outstanding shares at this point because the market capitalization cannot change they now have a value of $5 per share now let’s say they took it to an extreme and they
Said oh the stock is way overvalued and they did a 5 to 1 split now each person who has one share would now have five shares of that stock there are 5000 outstanding shares at that point so the share price will have a value of $2 at that point so as you can see market capitalisation never changes the only two variables that can change here are the outstanding
Shares as well as the price per share and obviously you can see this going in the opposite direction we’re going to talk a verse splits in another video but let’s say you are in a situation where your soft price was $2 a share the board of directors decided that that is too low they’re worried about getting delisted so they basically do a reverse split so five
Shares of that stock now become one and you’ll see the outstanding shares lower by a factor of five and you will see the price per share multiplied by a factor of five okay so why would you split a stock why does the board of directors decide that okay it’s time to split the stock up the number one reason is because the price per share is simply too high two stocks
That are very high right now that people are talking about as far as when they will split or amazon and google those two are basically rapidly approaching $1,000 per share a lot of time you’re watching this video they probably already exceeded that but that’s an example of a two stocks that many people say are very expensive now you have to understand that even
Though let’s say google did a two-to-one split and the share price fell the $500 a share even though the value really doesn’t change because the market capitalization doesn’t change of that stock a beginner investor may look at that and say oh my gosh you know $1,000 for one share i only have $2,000 i want to owe more than two shares of a company because they
Don’t really understand that that really isn’t a factor of how good that investment is but let’s just say for a numbers sake that google actually did a 10 to 1 split okay so now $1000 share of google is now $100 so now they look at it holy crap now i can get not two shares but 20 shares of google stock so you’ll see a lot of beginner investors buy into a stock
After they do a split because they see it as a cheaper stock to invest in and they kind of feel better about having more shares of that stock at the post saying okay i have two shares of google versus saying oh i have 20 shares of google so that is one of the reasons that they do a stock split so basically another reason two is that the share price is beyond the
Levels of similar company in the sector and again this is just for the fact that many beginner investors don’t take into consideration other factors they solely look at the stock price and if they see that stock is really high they’re going to want to have more bang for their buck they’re going to think that having more shares is better so they might want to
Buy a cheaper stock so basically this makes the shares seem more affordable to the uninformed or beginner investor when really the affordability of that stock does not change because that’s based on the price to earnings ratio of that stock which it has nothing to do with a stock split so basically what is the result after we have a stock split like i said it’s
A very good thing and investors who hold the stock that basically it’s split up they’re very excited and that’s for this reason right here that’s because a stock split often fuels an increase in the price per share and i’m sure you guys can kind of see the reason why the reason is that because is because the stock now seems more affordable in a lot of beginner
Investors or people who are on the fence about that stock now decide to buy that stock as such the demand for that stock increases and then the price per share increases as well and it’s also worth mentioning that a stock split is a sign of confidence that the company has in themselves because they’re basically saying we feel our stock is so overvalued we better
Split it up and they think it’s going to continue to go up in value if they were concerned that the stock would fall in value they would not do a stock split because it looks better when your stock price is higher in most cases but anyway guys that’s pretty much all i got on this video this is a stock split in a nutshell like i said if you want to see that video
On a reverse stock split make sure you guys check that out i’ll link it up at the end here as well so you guys can check that out but if you guys enjoyed this video please take a second and drop a like and then consider subscribing to be notified of any future uploads and as always i thank you guys for watching this video
Transcribed from video
WHAT IS A STOCK SPLIT? 📈 Stock Splits Explained By Ryan Scribner
