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
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 nigga 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
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