NVIDIA's Stock Split Explained - What It Means for Investors?

today I want to talk to you about the topic of stock splits what actually is a stock split what does it mean for us as investors and how can it potentially impact the stock price of a company in the future and what better example and talk about Nvidia which is actually about to do their own stock split on Monday so it's a great time to talk about it and see what that means for you and whether it makes the stock more attractive or less attractive let's talk about it right so an example of Nvidia right now one single share of Nvidia stock is costing $1,200 so that's quite expensive right and probably too expensive for a lot of people especially beginners when you want to start investing and you want to buy and own a full share that's a lot of money to spend if you just want to you know get invested with $100 $200 technically you couldn't buy that right while at the same time a lot of the new Brokers they do offer fractional ownership so you could buy half a share for example for $600 but still a lot of people you know psychologically when they see the price of one share they think it's very expensive but I'll come to this in a second because that price alone really doesn't tell you anything about the value of the company what is important is the market capitalization which is this number over here 2.97 trillion and it says over here market capitalization is basically the price the $1,200 times the number of shares that are in circulation so that price times all the shares how many millions or billions of shares and circulation those two multiply together gives you the total market capitalization the value of the company so to say and that's really an important number to keep in mind because that in a way tells you how valuable the company is relative to another company so you can see for example here the largest companies in the world as a global ranking actually compared to each other and right now we can still see Microsoft being the most valuable company in the world but second is Apple which for a while was actually the most valuable company but then in third space we have Nvidia which as you can see over here just dropped because actually for a few days it was second most valuable company they've really been performing extremely well I mean look at these numbers very small differences between each other so so personally I wouldn't be surprised that after the stock split we might potentially see Nvidia jumping onto the first spot but again something to be seen and something we'll talk about in this video but yeah just keep in mind that the market capitalization is much more important than just the pure share price we've seen over here by itself that's just an indicator it's just part of the equation but not the most important part but let's have a look how a stock split actually works right let's imagine you own two shares of Nvidia which is valued one share at $1,200 so in total your portfolio would be $2,400 right that's pretty straightforward that's what's in the past obviously if the share price continues to grow you will still have the same number of shares so if you have if the price now goes to $15,000 times two shares your value will be $3,000 so that's pretty straightforward so what does a 10 for one stock split mean that's actually what you should keep in mind it's a 10 for one because some other companies in the past and we'll come to this a little bit later on it's quite common for these stock splits to happen and some of them go for a 7 to1 for 4 to1 2 to1 so whatever the number is that's something you need to keep in mind as an investor So In This Very example for NVIDIA it's a 10 for one stock split and basically what it means is that they're going to divide the price that is currently 1,200 by 10 so now one stock will only cost you $120 but of course you'll be very upset right if you open Monday morning your broker and all of a sudden you see the value of your stock price collapsed by10 to only $120 You' be very upset right but don't panic to while they divide the share price by 10 they will also multiply the shares you own by 10 so you know the value will be less but the total number you own will be more so in total the total portfolio actually will not change at all it will still be the same number just a lower price per share but you will have more share so you're still going to have the same portfolio value than you had before the stock splits while it might seem a little bit complicated and overwhelming at first actually there's nothing for you to be done everything will be done by your stock broker so you have nothing to worry about so as soon as stock markets will open on Monday morning that change will be they obviously worked on that a while ago on Friday at the end of the stock market they made all the final adjustments and on Monday once the stock markets will open the stock will trade at $120 obviously a tenth of what it was before but the number will be 10 times more which also means that the market capitalization that number over here the 2.97 3 trillion technically will stay the same there's no difference obviously if the stock becomes more popular now it will go up yes but apart from that technically it will have exactly the same number as I said just the lower stock price but more shares in circulation now you may ask yourself why companies are actually doing it and there's a number of reasons so the first one has to do with accessibility because a lower share price makes it more attractive more affordable for people even as I said it's actually just psychological because technically you can buy fractional shares so you don't have to buy a whole share to be an owner of the company but still a lot of people they see the share price and they think wow it's quite affordable you know Nvidia cost $120 while Amazon for example cost $184 well in this case let's go for NVIDIA because it looks cheaper and you know everybody talks about it even though in many ways you have to look at other indicators earnings pressure price to earnings you know market capitalization so there's so many factors on here because you don't see the number of shares in circulation that's important to consider when you look at that number but still a lot of people only look at that and that's actually one of the big reasons why company do that another reason has to do with liquidity because having more shares in circulation means there's more liquidity right that can be traded imagine a company only only has five shares right I mean if those five people don't sell there's zero liquidity right now imine a company has a billion shares there's always going to be some people buying and selling so you have more liquidity and more liquidity brings more trading activity and that can only be good for a company you know to be seen and so forth so yeah you want to have liquidity and obviously having more shares leads to more liquidity and funnily enough as you can see over here there was a research done in the past that found out that companies that do a stock split once in a while actually seem to be performing 20 5% better than the S&P 500 in the following year so that's another reason it just shows you that you know those two factors accessibility and liquidity you know can definitely lead to a better performance not necessarily but on average that's what a study found and that's something to keep in mind when we as investors make our decisions now what does it mean for us as investors as I just mentioned your value of your portfolio if you already own shares in Nvidia it will stay absolutely same nothing will change to it as I said you will only have 10 times the amount of shares but the price per share will be a tenth of the previous price but of course you have the psychological effect because lower prices will bring in more people that think oh my God actually Nvidia is not so expensive let me buy a share in that right because not everybody is following the stock market right right now it's hot because it happened but you know a few months from now people never knew about the stock split they just see the price and I think well that's much more attractive than some other company and think about it birkshire had away one of the 10 biggest companies in the US you know run by Warren Buffett the famous investor one share cost six $22,000 I mean it's unbelievable and yeah I mean not so long ago a couple of years ago it was you know only $60,000 even back then it was crazy expensive right if I go into stock splits over here they've never done the stock split in the history and he does it very purposely however let's look at some other companies such as Apple for example right now at around $196 but when we look at stock splits over here you see that they had a number of stock splits over the years you can see over here in 1987 they did the stock split their first one 2 to1 so basically the price was cut in half but you would get twice the shares then back in 2000 another one 2 to1 then 2005 2 to1 then in 2014 a 7 to1 stock split quite a odd number but that's what they felt makes it the most attractive and so forth because also you don't want to have a 20 to1 right because that may not sit well with people so the most I've seen usually is a 10 to1 you rather want to do it more often than once every 20 years but then you know 30 to1 it just doesn't make sense so up to 10 to1 is usually the most people go for depending on how much the share price has been appreciating obviously and then most recently in 2020 a 4 to one so a lot of people don't even know about these stock splits they just see the price and think well it's very attractive but as I said it's just part of the story right and you see for example Microsoft right now at 423 so honestly I wouldn't be surprised if soon they do another stock split the last one was back in 2003 but you see previously every so often they had a number of splits over here one was even 1.5 to one so again different percentages but usually not more than 1 to 10 that's not common so yeah the last one back in 2003 so I think as the price of Microsoft continues to increase they might do the same story like Nvidia is doing now just to once again be perceived more attractively and have more liquidity for stocks to be traded on the stock market and then of course even Nvidia already has had some stock splits in the past you can see they started having the first one back in 2000 that was a 2 to1 split then another one 2001 another 2 to1 split then 2006 2:1 then 2007 7 21 and now most recently 10th of June which was last Friday at 10 to1 that was the highest one they've had because of the crazy appreciation and price in recent times that's why they had to have an even higher number over there and yeah obviously as I said on Monday once the stock market will open that price will be reflected instead of $1,200 the price per share will be $120 so what's going to be the impact of that stock split on the price in this case of Nvidia now personally I think in the short term it might actually bring in more new investors right now anyways Nvidia is already so hot right that's why they're splitting it plus now that the share price is supposed to be much cheaper than previously a lot of new investors might see that as a buying opportunity they'll see wow 120 per share maybe I'll just buy five shares which previously with that amount they couldn't even own one full share so I think a lot of new investors who believe in Nvidia or want to jump on the hype train they might get in right now so I think in short term that might actually bring a little bit of price appreciation plus the fact that the study I've shown you over here shown that in the past companies that have done a stock split usually see an increase in share price over time and more importantly with more trading activity due to higher liquidity and of course excitement with lower prices more people getting into the market I honestly wouldn't be surprised if Nvidia will actually very quickly reclaim second most valuable company in the world and you see the difference to the first one is then not so much so honestly with all that momentum behind it with stock spit happening right now I wouldn't be surprised if we see Nvidia very soon on the first spot as the most valuable company not just in the US but that's going to be the most valuable company in the world and that alone will further fuel the excitement people wanting to be part of it right it was the same when Apple was there everybody put their money into Apple because it was the most valuable company in the world so I think in short to midterm that's really going to be a smart move by Nvidia and a general company doing the stock splits if they have a strong fundamental business proposition behind right it's not that you have average company you do Spock split and all of a sudden becomes more valuable let's not forget that you really invest into the long-term performance of a company right that's the important part not short-term fluctuations these things you know they come and go they bring excitement they bring liquidity but long term it's the company and what they're offering and that's what you're investing in so if you think that AI is going to be the future chips are going to be needed for all kind of AIS right and of course right now Nvidia is in a very very strong position to capitalize on that again I don't know if they're going to be continuing to be the main player because right now so many others are coming on board so I think competition is definitely going to heat up but for the short to midterm I definitely see them continuing to ride the wave continuing to outperform as I said I wouldn't be surprised if they're soon going to be the most valuable company in the world do I personally think that 5 years or 10 years from now they're still going to be the most valuable company in the world I don't think so because we've seen so many changes over the years of the most valuable company not so long ago it was oil companies then we've seen Apple then Microsoft maybe Nvidia I don't know what's going to be 10 years from now that's why personally I invest into the S&P 500 that way I will always bet on the winning horse whoever is on the top I'm going to be profiting from it as a shareholder and that's why I think it's very easy set and forget it and that way I will basically own all of these shares without having to pick a winner I'll just dollar cost average and own all of them proportionately whoever does the best I will own them and I think that's the beauty of investing into the S&P 500 and if you want to learn more about it then check out this video over here stay healthy get wealthy and I see you in the next one ciao