Stock splits are interesting—psychologically more so than technically.
Google parent Alphabet just announced a 20-for-1 stock split and the share price is surging.
Here’s a (very) simple breakdown:
Google parent Alphabet just announced a 20-for-1 stock split and the share price is surging.
Here’s a (very) simple breakdown:
1/ There are two types of stock splits:
(1) Conventional
(2) Reverse
Let's focus on (1), as it’s the type that $GOOGL announced.
In a conventional split, a company issues more shares. Its share price is now lower, but the actual value of the Company does not change.
(1) Conventional
(2) Reverse
Let's focus on (1), as it’s the type that $GOOGL announced.
In a conventional split, a company issues more shares. Its share price is now lower, but the actual value of the Company does not change.
2/ Alphabet announced a 20-for-1 stock split.
So what happens?
You own 10 shares at a pre-split price of $3000 per share.
Post-split, you own 200 (10*20) shares at $150 ($3000/20) per share.
You have more shares, but there are more outstanding.
Your ownership did not change!
So what happens?
You own 10 shares at a pre-split price of $3000 per share.
Post-split, you own 200 (10*20) shares at $150 ($3000/20) per share.
You have more shares, but there are more outstanding.
Your ownership did not change!
3/ I find it best to walk through these concepts by using a simple story.
Imagine you’re at a poker table in Las Vegas.
You have $10,000 in the form of 10 $1,000 chips. Your only opponent has $100,000 in the form of 100 $1,000 chips.
The dealer asks to do an exchange.
Imagine you’re at a poker table in Las Vegas.
You have $10,000 in the form of 10 $1,000 chips. Your only opponent has $100,000 in the form of 100 $1,000 chips.
The dealer asks to do an exchange.
4/ He exchanges each $1,000 chip for 10 $100 chips (10-for-1).
So now you have 100 $100 chips and your opponent has 1000 $100 chips.
You still have $10,000 and your opponent still has $100,000—you’re in the same relative position as before the exchange.
That was a stock split!
So now you have 100 $100 chips and your opponent has 1000 $100 chips.
You still have $10,000 and your opponent still has $100,000—you’re in the same relative position as before the exchange.
That was a stock split!
5/ In a conventional stock split, the company increases its shares outstanding (by a factor) and reduces the per share price (by the same factor).
The total value of your ownership in the company stays the same, just like the total value of your chips at the poker table.
The total value of your ownership in the company stays the same, just like the total value of your chips at the poker table.
6/ The stock split has no impact on the fundamental value of a company.
Then why might a company decide to execute a stock split?
The most commonly cited reason is to allow smaller investors to buy shares of the stock—to bring the shares to the masses.
Then why might a company decide to execute a stock split?
The most commonly cited reason is to allow smaller investors to buy shares of the stock—to bring the shares to the masses.
7/ Back to the poker game analogy...
If you run a game and only allow $1,000 chips at your table, people with less than $1,000 cannot participate. The split enables broader participation.
But in a digital age, where buying fractional shares is possible, is this reasoning sound?
If you run a game and only allow $1,000 chips at your table, people with less than $1,000 cannot participate. The split enables broader participation.
But in a digital age, where buying fractional shares is possible, is this reasoning sound?
8/ Rationally speaking, probably not. Psychologically speaking, yes.
Humans are irrational—cognitive biases impact our decisions.
Being able to afford more shares of a stock feels good.
Buying a stock at $150 feels like a better bargain than buying it at $3,000…
Humans are irrational—cognitive biases impact our decisions.
Being able to afford more shares of a stock feels good.
Buying a stock at $150 feels like a better bargain than buying it at $3,000…
https://twitter.com/SahilBloom/status/1418910006557265932
9/ In the case of $GOOGL, the stock split may pave the way for its addition into the (archaic) price-weighted Dow Jones Industrial Average.
This may drive more inflows from all of the passive buyers of the index holdings, so could be another driver of the price surge this AM.
This may drive more inflows from all of the passive buyers of the index holdings, so could be another driver of the price surge this AM.
10/ Stock splits are quite simple and have no direct impact on the fundamental value of a stock.
They do, however, make the stock feel more “affordable”—at least in a psychological sense—for everyday investors.
Bring the stock to the masses…
They do, however, make the stock feel more “affordable”—at least in a psychological sense—for everyday investors.
Bring the stock to the masses…
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One note I failed to mention (that the community correctly pointed out):
There is a real, tangible impact on the price and accessibility of options contracts on $GOOGL, which represent 100 shares.
The lower share price does help in a legitimate, practical sense here.
There is a real, tangible impact on the price and accessibility of options contracts on $GOOGL, which represent 100 shares.
The lower share price does help in a legitimate, practical sense here.
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