Stocks Can Go Up, Down, and Even Split... Wait, Split? Let Me Explain
Here is why you did not just lose all your gains from a stock
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An Event That Does Not Happen Often
When deciding what to write about next, I have a conversation with my brother to thank for my source of inspiration for this article. The same brother who was interviewed on the last podcast episode about his career experience. Check that out below!
In that conversation we discussed why Amazon’s stock price is sitting at $100 a share instead of almost $3,000 per share like it was back in the spring of this year. I know many of you might be thinking right now, “Oh crap, did my Amazon stock just tank??” The short answer is, no, it split.
This split was the first time since the 90s for Amazon. As the title of this section says, this does not happen often for large cap companies such as Amazon.
“Ok, it split, but that does not calm my nerves about it.”
I know I know, so let’s dive into what a stock split is and what they usually mean for you as an investor.
Stock Splits
There are two types of stock splits, conventional/forward and reverse. This article will only touch on conventional/forward stock splits, as they happen way more often. I will circle back to reverse stock splits another day, don’t you worry.
Conventional Stock Splits
This occurs when a company divides its existing shares into more shares through a specific ratio determined by the company (Ex. 2-for-1, 3-for-1, etc.). This, in turn, drives the price of each share down, depending on the ratio, but keeps the total value of the company’s shares the same.
Let me show you some numbers to help visualize (down pointing hand)
Before stock split you had:
10 shares of a company valued at $100 per share = $1,000 total value
After 2-for-1 stock split you would have:
20 shares of that company valued at $50 per share = $1,000 total value
See how the total value never changes? The shares are simply split up into smaller pieces. See what I did there? When a company does this, the number of outstanding shares changes, basically, providing more shares to the public.
Why Do Companies Split Their Stock?
The number one reason for a company splitting their stock is if the stock price is currently too high for most people to consider buying one or multiple sets of shares. Think about our Amazon example, it would be very hard for someone to get in on Amazon stock with the price being near $3,000 per share. The price of $100 per share is much more manageable. The company hopes that by splitting their stock, more people will purchase shares and in turn the company’s liquidity will rise.
Thankfully with today’s technology fractional share purchase ability is becoming more and more common so people can get it at whatever share price works for their investing allotment.
So, I own more shares now?
Yes! However, the total value is not more. If you look at your online investing account, you will see if one of your stocks was a 2-for-1 split, this will give you double the number of shares you had before, but your account total value will still stay the same.
Stock splits mean the stock is going to the moon then, right?
Unfortunately, that is not always the case. Some studies and investors may tell you stocks that split are positive signs of business growth and that the overall value of the stock will continue to rise, but as you all know, that does not always tell the whole story. Make sure to always study all the other fundamentals of a business before deciding.
Need help defining some of the most common phrases and stats in investing? Check out my previous article featuring the essential definition list of 30 investing terms.
Hope you learned something new today! Check out other previous investing articles I have written below if you want to learn more from The In-Between today:
What is Your Net Worth? Time to Crunch the Numbers
The Psychology of Stock Market Cycles
What Are All Those Numbers Under a Stock Chart?
Cheers!
*This article is for educational purposes only. This is not financial advice. For all topics regarding finance and investing always speak with a financial service provider.
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