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Finance Allah Shmoop what is a stock split forward and

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reverse Well there are more ways of slicing dicing and

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reorganizing the structure of the ownership pie you bought into

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when you acquired those three hundred shares of whatever dot

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com And in the background you hear the rhythmic pounding

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of leather shoes on wood floor the sound of retail

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investors jumping up and down with excitement when a stock

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splits This is very strange to professional investors because when

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a stock splits it is in fact a mathematically neutral

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event neither good nor bad Think about it like the

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apple your grandma had divided in half for you for

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easy gumming you know when you were not quite two

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years old Then when you grew six months older and

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who had a tooth or two she split it into

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four pieces instead Cause for celebration jumping up and down

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headlines No not at all So why do company split

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their stock in the first place But mainly to make

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it easier to buy for retail buyers Famously Disney has

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always had a very large percentage of its ownership ownership

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of its shares owned by small fish retail buyers and

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buyers liketo buy in round lots or they have to

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pay all kinds of extra commission fees in normal brokered

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setups Note that around Lot comes in units of one

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hundred shares So let's think about that hundred shares Number

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one hundred shares is the minimum you khun by to

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form around lot than if Disney were trading it well

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on I'll say a five hundred dollars a share Well

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the minimum round lot unit that a retail investor would

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have to spend toe by their single round lot slice

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of the Magic Kingdom ESPN ABC and beyond Well that

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would be one hundred times five hundred or fifty thousand

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bucks And that's a lot of dough for a plumber

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a teacher up a dia trist even a mob boss

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Okay well and not a very successful mob boss Yeah

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sorry Jimmy Walnuts were just keeping really so Disney has

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split its stock a bunch of times It wants to

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appeal to the masses of retail investors who love their

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product Will Google has done the office it Google may

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or may not have a lot of retail investors but

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they just don't want to deal with them The company

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has insular management who has super voting stock which is

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owned mostly by the founders and a kind of Silicon

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Valley arrogance even more pungent than what whips up here

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from Hollywood So when GOOG stock kisses five hundred bucks

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a share or a thousand dollars a share while the

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company is very happy to limit their ownership high to

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investors who can afford to invest at least in a

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fifty or a hundred grand in just one stock So

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here's the math simplified whatever dot com has one hundred

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million shares outstanding and this year will conveniently earn two

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hundred million dollars That's two bucks a share If you're

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keeping track its stock currently trays at fifty dollars a

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share And the company wants to make it easier for

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the less wealthy to be able to buy slices of

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its pie So it forward splits its shares to for

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one But what does that mean Well all of a

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sudden the number of shares immediately doubles from one hundred

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million to two hundred million The company will still earn

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the same two hundred million dollars this year But now

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instead of earning two dollars a share that two hundred

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million dollars over the hundred million shares now they'll earn

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two hundred million dollars over two hundred million shares or

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a dollar a share So what Fifty dollars a share

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They were trading in twenty five times the two dollars

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a share earnings And mathematically they should still trade at

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twenty five times earnings Nothing else has changed Holding now

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earnings are a dollar share instead of two dollars So

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the moment the forward stock split is effected while the

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stock should notionally get cut exactly in half But in

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practice this does not usually happen In fact when companies

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announced stock splits their stocks usually go up Why Because

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it's on ly what companies feel confident in their business

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that they choose to announce a forward stock split like

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this Think about the opposite case If loser dot com

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was earning only forty cents a share trading it ten

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times earnings and they were worried that their forty cents

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a share in earnings would go to a few pennies

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a share next steer under a failed business cycle like

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a lost lawsuit or somehow they got Amazon Well their

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stock might then go from trading at four bucks a

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share that ten times the forty cents number down toe

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under a dollar a share and if it exists under

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a dollar a share for very long with a company

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is for forcibly delisted from pretty much whatever exchange it

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was then trading on in that case well the company

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that has to do a reverse split to protect their

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share price and keep it well above that minimum dollars

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Shared delisting bomb The math right company here is a

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loser dot com They have one hundred million shares outstanding

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and will earn forty million dollars this year or forty

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cents a share at ten times earnings The stock trades

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for four bucks and if next year it signals that

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it will on Ly earn a dime and it expects

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to continue holding its ten times earnings multiple Well then

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the stock is at risk for kissing that dollar And

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if it does and it gets delisted well it's likely

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that all the current owners of the stock will dump

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it because their mutual funds aren't allowed to own pink

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sheet investments or other off exchange things And that would

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be a disaster for the company seeking any kind of

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liquidity or ability to turn ownership into cash I eat

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the management would no longer be able to sell stock

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and buy Porsche is to avoid the black smoldering hole

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in the ground Loser dot com then does a reverse

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four for one split such that a hundred million shares

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outstanding now go to only being twenty five million and

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a dime A share projected for next year becomes forty

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cents and it's likely that the four bucks a share

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Stock III words trading today becomes sixteen dollars all else

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being equal So yeah that's forward and reverse stock splits

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In a nutshell And while speaking of nuts if you

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fail to pay Jimmy well nuts when he's shaking you

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down he has a very different idea of forward and 00:05:50.948 --> [endTime] reverse split

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