Tech Stock Plummets Amid Fraud Scandal

MARKETS
YEAR-TO-DATE

EDUCATION
Navigating Stock Splits

You may have seen the headlines when companies like Apple and Amazon announced stock splits. Stock splits tend to grab attention, but if you’re like most investors, you may be wondering: what does a stock split actually mean, and should you do anything about it? Let’s break it down in a simple, conversational way.

What Is a Stock Split?

A stock split is when a company divides its existing shares into multiple shares to make its stock more affordable. Imagine you own a pizza that you’ve cut into four slices. If you decide to slice each piece again, you now have eight smaller slices, but you still have the same pizza. That’s how a stock split works—you’re just increasing the number of slices (shares) without changing the total value of the pizza (your investment).

For example, let’s say a company’s stock is trading at $1,000 per share. In a 4-for-1 split, each share would be divided into four, making the new share price $250. If you owned one share worth $1,000, after the split, you’d now own four shares worth $250 each. The total value of your investment hasn’t changed, but the number of shares has increased.

Why Do Companies Split Their Stock?

Companies usually split their stock for two main reasons: to make shares more affordable for everyday investors and to increase liquidity in the market.

1. Making Shares More Affordable: A high stock price can make it challenging for new or smaller investors to buy in. By lowering the share price, companies make it easier for a broader range of investors to participate. Amazon is a recent example of this. In 2022, Amazon announced a 20-for-1 stock split, which reduced its share price from over $2,000 to around $125, making it more accessible for individual investors.

2. Increasing Liquidity: Stock splits can also increase a stock’s liquidity, meaning more shares are available to trade. Higher liquidity typically leads to smoother price movement and less volatility because more shares are being bought and sold daily. Apple has famously used stock splits for this reason, completing five stock splits since it went public, the most recent being a 4-for-1 split in 2020.

Types of Stock Splits: 2-for-1, 4-for-1, and More

Stock splits come in different forms. The most common type is a 2-for-1 split, where each share is split into two. But splits can vary depending on what the company wants to achieve. Some recent examples include:

• Apple’s 4-for-1 split in 2020, which took each share price from around $500 to approximately $125.

• Tesla did a 5-for-1 split in 2020, reducing the stock price from around $2,000 to about $400.

These splits make shares more affordable and allow more investors to participate. However, just because a company splits its stock doesn’t mean it’s more valuable; it’s simply more accessible.

What Does a Stock Split Mean for Your Portfolio?

For current shareholders, a stock split doesn’t directly change the value of their holdings. Your investment in the company remains the same, but the number of shares you own increases. However, there are some indirect effects to consider.

1. Increased Demand: Stock splits often attract new investors because of the lower share price, leading to increased demand. This can push up the stock’s price post-split, at least temporarily. For example, Tesla saw its stock price rise significantly after its 2020 split as new investors jumped in.

2. Psychological Boost: A split can sometimes serve as a psychological boost for both the market and shareholders. A company that’s consistently growing in value and executing stock splits signals confidence. When Apple or Amazon splits its stock, it’s like a statement that the company expects its growth to continue.

3. Potential for Long-Term Gains: Although splits themselves don’t change a company’s value, companies that split their stock are often growth-oriented and doing well financially. Historically, companies that initiate stock splits have been associated with future growth, as they’re usually on a strong upward trend.

What About Reverse Stock Splits?

On the flip side, there’s something called a reverse stock split. This is when a company reduces its number of shares, usually to increase the stock price. For example, a 1-for-10 reverse split would mean that if you owned 10 shares at $10 each, after the split, you’d own one share at $100. Reverse splits are often used by struggling companies trying to boost their stock price to avoid being delisted from an exchange.

While stock splits are generally seen as positive, reverse splits can be a red flag. They often indicate that a company is facing challenges, so it’s worth doing some research if you see a company you own announcing a reverse split.

The Bottom Line

Stock splits are often a positive sign, signaling a company’s growth and making shares more affordable to the average investor. For long-term shareholders, splits can add liquidity and potentially drive up the stock’s price as more people buy in. But it’s essential to remember that a stock split doesn’t change the company’s fundamentals—it simply changes the share price.

Whether you’re a current shareholder or considering buying a stock post-split, the key is to focus on the company’s long-term potential. After all, a lower share price might make it easier to buy in, but it’s the company’s performance that ultimately drives value.

HEADLINES
What You Need To Know

Super Micro's stock plunged another 11% on Friday, marking a 45% drop this week as investor concerns grow after the company lost its second auditor in less than two years. Shares closed at $26.05, erasing all 2024 gains. The stock, which hit $118.81 in March amid optimism over data center growth and AI-driven server sales, has now shed about $55 billion in market cap. Super Micro faces potential Nasdaq delisting as it continues to delay filing financial reports, citing disputes with former auditor Ernst & Young. Adding to the turmoil, a DOJ investigation and short-seller accusations of accounting manipulation have raised further doubts.

OpenAI has launched a new search feature within ChatGPT, aiming to compete directly with search engines like Google, Bing, and Perplexity. Named SearchGPT, the tool provides real-time information such as sports scores, stock quotes, news, and weather, leveraging web searches and data from various news partners. OpenAI CEO Sam Altman called it his "favorite feature" so far, emphasizing its conversational, intuitive approach to finding information. The feature is available for ChatGPT Plus and Team users and will gradually roll out to others, adding another competitive layer in search as OpenAI continues to challenge tech giants, including major investor Microsoft.

JPMorgan Chase has started suing customers accused of exploiting an "infinite money glitch" that allowed them to withdraw funds before checks bounced. Lawsuits were filed Monday in Texas, Miami, and California, targeting individuals who allegedly took out large sums, with one Houston case involving $290,939 withdrawn from a $335,000 counterfeit check. The glitch, which gained attention on TikTok, highlights vulnerabilities banks face from social media amplification. JPMorgan, which closed the loophole in August, is demanding repayment with fees and has also referred cases to law enforcement, signaling its stance against fraud.

TIP
Contribution Limits

The IRS has raised 2025 contribution limits for retirement plans to address inflation. The annual limit for 401(k) plans will increase from $23,000 to $23,500, affecting 403(b) plans, governmental 457 plans, and the Thrift Savings Plan. IRA contributions, however, remain capped at $7,000, with a $1,000 catch-up for those 50+. Catch-up contributions for 401(k)s for those 50+ stay at $7,500, but for ages 60-63, it rises to $11,250. Traditional and Roth IRA income limits have also increased for tax deductions and contributions, making it easier for more taxpayers to save on taxes and grow their retirement funds.

CHART
Building Wealth Takes Time

Actions
Steps to Level Up

READ: A Short History of OpenAi

LISTEN: The Art of Franchise Investing

WATCH: The Untold Story of Bank of America

RESEARCH: Election Winners Stocks To Watch

EXPLORE: This Side Hustle Can Pay 6 Figures A Year