Stock splits divide shares into more pieces at lower prices without changing what you own. A 1-to-5 split turns a $100 share into five $20 shares. Lower prices attract more buyers and can push the stock up, but reverse splits, common in penny stocks, are a red flag.
The split. A stock split usually occurs when a stock price has gone too high, making it difficult for investors to afford. To make the stock more accessible for these investors, the company decides to divide every single stock for multiple while proportionately adjusting the stock price. And if you didn't understand the word, you're going to understand in 1 minute. Let's say we have 4 pieces of cake and we host 8 people and we want every single person to have a piece of cake. What we can do is take these 4 pieces of cake and cut each one of them in the middle, and behold, we have 8 pieces of cake for 8 of our guests. Now, yeah, sure, every single size is a little bit smaller, but the amount of cake is still the same amount of cake. Now we can all eat cake and get fat. So when a company does a split, in order for the company to maintain the market cap, it proportionally divides the amount of shares and the stock price. For example, let's say we have a stock trading at $100 and the company decides to do a 1-to-5 split. So for every 1 share, we will now have 5 shares. In order for the company to proportionally adjust and maintain the same market cap, we're also going to need to divide the stock price by 5 because 1-to-5. So So the new stock price is going to be $20 because $100 divided by 5 is going to be $20. Capisce? Another example is we divide the same stock, which was $100 per share, by 2. So let's say we have a stock split of 1 to 2. We divide the share price by 2 and multiply the amount of shares by 2. That way we proportionately maintained the same market cap. Now, what will happen if you hold a stock that does a It's quite simple. The next time you're going to open your broker account, depending on the split ratio, you're going to see double the amount of shares, triple the amount of shares. And let's say it's 1:5. It's going to be 5 times the amount of shares. And usually the chart is going to look all messed up because of the difference in the stock price, but rest assured it's still the same value. So if you owned 100 shares of Tesla prior to the split and they did a 1:2 split, you're going to see double the amount of shares and And the stock price is going to be cut in half. Now, how can we benefit from a stock split? As I mentioned earlier, it does not change the value of the company or the market cap. Usually, because more investors can now afford to buy the stock, or at least it's being perceived that way, the stock price will go higher as a stock split is being perceived as good news. And if we buy early enough, we can benefit from the rise. To keep it short, a stock split is basically one company wanting to attract new investors, multiply the amount of shares, and accordingly divide the price of the share, and is usually perceived bullish or good news, which causes the price to go up. Now, besides the split, we have the complete opposite, which is the reverse split. In a reverse split, the company reduces the amount of shares and increases the price based on a predetermined ratio. It is usually a tactic being used by companies in the New York Stock Exchange or the NASDAQ or even the OTC to basically increase the stock price. That is because they probably don't manage to sustain the NASDAQ or New York Stock Exchange requirements, which is to maintain a specific price unless you want to get delisted. Now let's go back to the cake example. Let's say 4 of our guests does not eat dairy. It's 2024, you know, and they haven't told us beforehand. And because our fridge just broke down and no one eats pieces of cake, we decide to do something a little bit freaky. We take 2 pieces of cake and we combine them together for 1, and we do that with all the new 8 pieces of cake we have, creating 4 pieces of cake which are bigger. But because no one eats 2 pieces of cake and we don't have a fridge, we want to get rid of the cake. Now, this situation is highly unlikely, but a reverse split is really likely because, as I mentioned earlier, it's usually being conducted by companies that need to do it in order to maintain the regulatory requirements. And in the OTC and the penny world, it's going to happen because the company usually dilutes too much shares and has become fatter with a big float. Now, how can we benefit from a reverse split unlike a split? Honestly, we can't, and you should run the other way. A reverse split is like a wild card in the penny stock world because you can't know if it's going to get dumped or pumped. And because we're not gamblers, we're not going to touch it. It's actually the worst news you can have in the OTC, so I highly recommend not touching it in the OTC penny stocks and even the higher exchanges. I personally do not invest or trade these stocks, so I cannot give you recommendations based on something that I don't do myself. So just run the other way because you might get shot, and we don't want to get shot.
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