so with the recent news of the apple stock split being a four to one stock
split and the tesla stock split being a five to one
i thought i'd quickly explain what exactly a stock split is
and how it's actually going to affect you as an investor
so that we can quickly go through this information and you can learn something
new so to start off i want to mention that
there are two types of stock splits that you need to be paying attention to
the first one is called a conventional stock split and this is just the normal
kind that we're seeing right now with tesla and apple
and then there's another type of stock split called a reverse stock split and
this is more uncommon but it does happen so i'm going to
explain how both of these work so you guys can learn something new okay
so with the conventional stock split the way that i want to explain it to you
guys is kind of like a pizza think of a share of a company as an
entire pizza now what you're going to do is if the company decides that they want
to do a stock split the conventional way is that they are actually going to split
that pie into more pieces so for instance apple right now is going
with a four to one stock split so they're gonna take that pizza that's a
hole right now and they're gonna split it into four new
pieces now what this means is that if the share
price is a hundred bucks and now you turn it into four
new slices then those shares are now going to be worth 25
so it actually looks better to the public because you can get into the
stock a lot easier because it's only 25 rather than 100
and this is exactly how it works because right now if you wanted to own
one share of tesla you're going to be in it over 2 000
and that is a lot of money just to invest in one specific company
because honestly most of us out there when we have a little bit of money to
invest it's probably going to be less than 500
bucks so in this case tesla they're doing a five to one stock
split at the end of august and 2020 as i'm making this video
and because they're trading at over two thousand dollars a share when they do
this split it's going to turn it into a five to one
like i said and now the shares are going to be 400
apiece which is a lot more affordable as a
perceived value because we all know that 400 dollars
sounds a lot less than 2 000 even though the math is exactly the same
now we'll go over how to do the math here in just a minute
but i do want to bring up a couple points here and the first point that i
want to mention is the fact that the perceived value
meaning the share price does not necessarily
mean that it's a good value okay for so for instance if you guys
wanted to buy a bag of doritos and it was 10 bucks
we all know that that's a rip-off because we're used to them being about
two bucks but we all know that you're not going to
break the bank if you do buy that bag of doritos for 10 bucks
so it's the same way on the stock market you don't want to just look at the price
of a share and determine that that is a good value
so if you find a company that's only five dollars a share versus two hundred
dollars a share that has nothing to do with whether or not it's a
good value or a bad value so just keep that in mind
because when there's a stock split it does look a little bit better
but nothing changes on the back end and then another point that i want to make
is a lot of brokerages out there actually let you invest in what are
called fractional shares nowadays and what this means is that you don't
have to buy whole shares of a company in order to invest with them because
traditionally if you wanted to invest in let's say google
and they cost over fifteen hundred dollars a share then you're going to
have to have at least fifteen hundred dollars to invest in
that specific company but with fractional shares you can start
with as little as a dollar so for instance on robinhood i'm pretty
sure they have a dollar minimum to invest in fractional shares
and also m1 finance another brokerage they have a ten dollar minimum
investment so this means that for as little as a
dollar on one brokerage and ten dollars on another brokerage
you can invest in a specific company but you don't have to have that much money
to start investing with them so when it comes to stock splits
stock splits don't really matter if that brokerage offers fractional shares
because obviously you can just get into the company with as little money as you
want whereas with a normal brokerage account
that doesn't allow you to do fractional shares
you would want something like a stock split so that you could actually afford
to get into those specific companies now as far
as the math goes when it comes to a stock split if you yourself
already own shares of a company and they announce a stock split
nothing is going to happen to the value of your portfolio
you're just going to own more shares and so i'm going to explain exactly how that
works really quick so that you guys can make sense of it so
let's pretend that you own 10 shares of a company
and that company's share price is a thousand dollars a piece
so in this case you have a ten thousand dollar investment in your portfolio
now they announce a five to one stock split and what this means for you
is that your share price is now going to only be worth two hundred dollars a
piece but now you're going to own 50 shares
which is still 10 000 so it's exactly the same you just
own more shares and that is exactly how it works
and that's all you have to worry about because it's really not going to affect
you it just looks a little bit different
from an outside perspective and then one thing that i am in favor of
when it comes to stock splits is the fact that there's always going to
be a lot of hype around that specific company
whenever they announce the split so for instance there's going to be a lot of
investors out there that want to pump more money into that company in hopes
that when they have the split they're going to own more shares even though
like i said the math is exactly the same but to them it's a higher perceived
value because now they own more shares of that company now because that
happens generally the stock price is going to go
up a little bit and that can help you as an investor
and also in the future of the company going forward
i think that a stock split is a good idea when they can get those prices down
because for instance if it was 1500 bucks a piece and now it's only 400
bucks a piece and all those brokerages out there that
don't allow fractional shares this is a really good way for more
investors to start investing in those specific companies because i
want more people to own that specific company that i'm invested in
because that means that the stock price is going to go up so when it's only 400
versus 1500 it's a lot easier to get in for most investors out there because
like i said most of us probably just have about 500
or less whenever we have a little bit of extra money to invest in
now a reverse stock split is exactly the opposite as a conventional stock split
that i was just talking about so with the reverse stock split what's
going to happen is the shares are actually going to go
down so that means if you own 10 shares and they did a two for one
then now you'd own five shares of that company
but the value of those shares would double so the math is exactly the same
but now you have less shares of that specific
company now when it comes to a reverse stock split the only reason why a
company would want to be doing that is because their share prices were
falling below the standard requirements of being on the stock market so for
instance if you had a share price of only two bucks
and that wasn't meeting the requirements to stay on the market
then you would do a reverse stock split so that you could retire a bunch of
shares but you could get the share price to go
back up to the level that met those requirements so that's one of the
reasons why a lot of companies decide to do a
reverse split so if a company was trading at only five dollars per share
and then the company announced a reverse stock split of five to one
then what this would mean is that the share price would go up to 25
a piece but there would be five times less shares on the market
because those would need to be retired now in this case it just
is a perceived value once again the stock price goes up
but nothing on the math end actually changed so in this case if you had a
thousand shares of that company that are worth five dollars a piece
then you would have a five thousand dollar investment in your portfolio
now with the reverse split being a five to one you're now only going to have 200
shares of that company but they're going to be worth 25 dollars
a piece which is still the 5 000 investment that you originally started
with so like i said earlier the math is exactly the same
with the reverse stock split and it's also the same with the conventional
stock split you just have to look at it a different
way now if you guys are interested in investing i do have an affiliate link
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also if you guys just found this channel i'm jason with honest finance
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if you're into this type of content but thank you for watching and have a great
day