Page Text: Home › 📈 The secret behind stock splits
📈 The secret behind stock splits
The Hustle
April 13, 2022
PLUS: Inflation conundrums, FAA memes, paper computer models, and more.
Between 1959 and 1962, artist Yves Klein sold invisible “zones of empty space” in exchange for gold bullion. All buyers got was a receipt, which they were encouraged to burn as Klein dumped ½ his payment in a river. Sotheby’s, which just auctioned off a rare remaining receipt for $1.2m, said some see it as an “ancestor of the NFT.”
In today’s email:
Splits, explained: As in stock splits. Not banana.
Uh-oh: Why thinking about inflation leads to more inflation.
Air rage: The FAA issued highest-ever fines to unruly flyers.
Around the web: TikTok’s most popular songs, writing tools, DIY computer crafts, and more cool internet finds.
🎧 On the go? Listen to today’s podcast to hear Steph Smith discuss creator economies in the metaverse, plus, dwindling Kmarts.
The big idea
Why do companies do stock splits?
On Monday, Shopify announced its plans for a 10-for-1 stock split to make share ownership more accessible. So, uh, what’s that?
For starters, the financial maneuver doesn’t change the market capitalization of a company — just its number of outstanding shares.
For example, say you own one share of a company’s stock at $1k per share. A 5-to-1 stock split would give you 5 shares at $200 per share. Math!
But why are companies like Tesla, Amazon, and Alphabet all doing it?
Historically…
… companies have issued stock splits to increase trading volume when their stock price has gotten too high. Examples include:
Apple issuing a 4-to-1 split in 2020 ($500 to $125), leading to a spike in trading among retail investors (AKA regular people).
Berkshire Hathaway issuing a 50-to-1 split for its Class B shares in 2010, resulting in a boost in liquidity (trading shares became cheaper and faster). This boost made it eligible for the S&P 500.
But these days, trading platforms like Robinhood allow investors to buy fractional shares of a stock (for example, ¼ of a share), making share price less important.
With that in mind, Virginia Tech finance professor Derek Klock says stock splits are a psychological play — a way for a company to tell the market it expects its stock to keep going up.
Warren Buffett once said…
… stock splits are irrelevant, comparing the move to cutting a pie into more pieces. But the data seems to prove it works:
Tesla, Google, and Amazon all saw net purchases double after announcing splits.
Plus, research from Nasdaq found that simply announcing a split leads to a 2.5% increase in share price, and companies that issue splits beat the market by ~5% in one year.
Bonus: Here’s a boppy old-school stock rap . “A company is kinda like a pie (pie!), a stock is a slice that you buy (buy!).”
SNIPPETS
Coffee bot: Panera Bread is trying out Miso Robotics’ coffee brewing system at 2 locations, allowing human workers to focus on other tasks. #ecommerce-retail
What’s an ‘invisible energy highway’? NeuConnect’s undersea cables that will allow 1.4 gigawatts of electricity to pass between the UK and Germany. #clean-energy
A video of a Cruise driverless taxi getting pulled over for not having its headlights on has gone viral . Apparently, the car behaved as intended: it yielded, then safely pulled over. #emerging-tech
Huh: Forbes is releasing Virtual NFT Billionaires, an NFT collection of 100 “fictional investors” with “enormous theoretical portfolio and virtual net worth.” #fintech-crypto
Wow: Protecting Zuck and his family cost Meta $26.8m in 2021, accounting for travel, security, and covid protocols. That figure is most of his compensation. #big-tech
uh-oh
Why thinking about inflation leads to more inflation
When thinking about a problem is, in itself, a problem, you’ve got a problem.
Some context: In March, inflation was up 8.5% YoY.
The average American is expected to need an additional ~$5k this year to live the same life they did last year, and many Americans lack confidence in current economic policies to fight inflation.
What’s worse — if people and businesses just expect inflation to continue into the future, inflationary psychology could take hold and lead to even higher prices, salaries, and spending. Here’s how.