Apple and Tesla recently announced stock splits.
In this podcast episode, I share what stock splits are and how they could impact your portfolio.
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Michael Lacy 0:00
What's up? What's up? What's up teammates, Michael from winning to wealth here for money talk Monday, number 36. And this week, I want to talk to you specifically about stock splits. Now recently, Apple announced the four for one stock split, which was followed by Tesla announcing a five for one stock split. So what does this mean and how does it affect your portfolio? Well, let's talk about it.
So what is a stock split? Put simply, stock splits are a way for a company to increase the number of shares outstanding while also lowering the price of its shares. You may be wondering what all that means. I want you to imagine your favorite pies sitting for sale in a bakery for $8 this pie is going to represent the value of a company. So let's say that company is Apple. So you've got this whole $8 pie that's representing apple. And when Apple went public and started trading, the pie was cut into slices and offered to the public. Those slices are what we call shares. So let's say the $8 pie was cut into eight slices, which means the price of each slice should be $1. You claim one of the slices for yourself and now you own one apple share worth $1. Apple then announces that they're going to do this for for one stock split. This means every share you own has now been split into four shares. However, each share is now worth 25 cents instead of the $1. So now instead of owning one slice of pie for $1 you own for smaller slices of the pie were 25 cents which still adds up to the $1. So even though the value of each share is less, you didn't lose anything. And that's important because with a stock split, you don't have more or less pie. The slice you own was just cut into smaller pieces. Tonight you may be wondering why a company would do a stock split if it doesn't really add value to the company? Well, most companies do a stock split when they believe their share price is just too high for the average investor to acquire what is called a board lock, which is typically 100 shares has to do a trading you can google board locks on your own to learn more about that. But a stock split lowers the price per share, thus lowering the barrier to entry for new investors. There's also value in perception. So for example, when a large cap company like an apple does a stock split, the perception among investors is that the company must be ready to grow or expand which could lead to higher rates of return for investors. This perception could pop lead to increase liquidity as investors buy up the stock at the cheaper prices. So now how does this affect you? The truth is value of shares increase over time because of the business results that companies put up, not necessarily because of how the ownership of the shares get sliced. Now, are there instances where stock splits lead to increase in share value? Absolutely. And there's research that actually shows that it's more likely than not that the value of a stock will increase after a stock split. But I want you to know that stock splits are not a guarantee that stock value will go up. stock splits generate a lot of excitement in the market, and rightfully so in most cases. But at the end of the day, the most important thing that you can do is to continue your personal investing strategy over time and build wealth that way. Now, those are just some of the basics on stock splits, but if you have more questions on them, be sure to head over to my private Facebook group. We can discuss stock splits or any other investing questions that you have more in depth. You can find the group over at winning to wealth comm slash teammates. Also if this money talk helps you better understand stock splits, be sure to tap the subscribe button and leave a five star review. But hey, that's all the time I have for this week. So until we talk again, keep racking up those wins one at a time. Take care
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