BI Family...2020 has been a year for the ages and will not be forgotten anytime soon.
A lot has happened this year. The market crashed in the first quarter, which presented an incredible buying opportunity for those of you in our community. Stamps and WPX were quick wins for Brown Investors with 100%+ gains.
With all that's happened, we recognize there's still so much confusion around how to profit and grow your investment in today's climate. From IPOs to stock splits, some of these terms are still unclear. This is why we're writing this special edition newsletter because something incredible recently happened. You guessed it! Two companies you likely have heard of are now trading at a much lower price because of a stock split; Tesla 5:1 stock split and Apple 4:1 stock split.
What are Stock Splits?
Stock splits are corporate actions by a company's board to increase the number of its outstanding shares by dividing them into multiple shares. This, in turn, reduces the share price without affecting the company's market capitalization or the value of a shareholder's stock.
So, why would a company decide to perform a stock split?
A stock split commonly happens when a publicly-traded company's stock increases in value too much that new investors are unable to buy the shares. At this point, the quoted market price per share becomes too high, affecting the market liquidity as fewer people can purchase the shares.
Stock splits are usually calculated through a 'ratio' arithmetic. For example, the Tesla stock split was a 5:1, while the Apple split was a 4:1. These ratios show how the shares were split; the Tesla stock had every share divided into five, while the Apple split had every share divided into four.
What Happens in a Stock Split?
A stock split does not make the current investors richer, at least not right away. The investors will have more shares, but the shares will have less value, which means that an investor's total value will not change at all.
The stock split is, however, positive news for an investor. Even though their investment will not change, announcing a stock split shows that the company's board wants to attract new investors by increasing the number of shares in the market and reducing the price per share. With the price reduction, it is easier to move your stock in the current market as more people can afford it.
In theory, the increase in demand due to the price drop will be matched by the increase in supply due to more shares available in the market. You are, however, bound to make a handsome return on your portfolio if the stock continues to appreciate.
Reverse Stock Splits Explained
Companies perform reverse stock splits to boost their stock price by reducing the number of shares outstanding. The company cancels its current outstanding stock and redistributes fewer shares to its shareholders in proportion to the shares owned before the reverse split.
If a company offers a 10:1 reverse split, it will cancel its shares and reissue a share for every 10 shares previously owned. If a shareholder owned 1,000 shares before the split, the shares are revoked, and they only receive 100 shares after the split. The total value of the shares held by a shareholder would, however, remain the same, just like in a stock split.
Reverse stock splits are usually done after the company's stock price has dropped significantly to prevent the company from being delisted and to maintain its reputation. It is usually bad news for the investors, but it may cause the price of a company's stock to rise from the level of over the counter trade to a significant stock exchange level trade.
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