Wednesday, December 07, 2005

A pie is a pie, any way you slice it.

Quick quiz:

Let's say there is a company called Greggie. Is it worth more at $5 or $10 or $500?

The answer to the above (before any other analysis) depends on how many shares there are. If there are 10,000 shares when the stock is priced at $5 the value is $50,000. If there are 100 shares when it is priced at $500 it is also worth $50,000.

I have heard and overheard many times people say: "this stock is only 5 dollars, what a deal" or "this stock is worth 150, its too expensive." (oddly I have heard this about Sirius several times already).

It's just a simple math discussion.

Along this same math...who cares if a stock splits!? Great I have twice as many shares and the stock cut in half. Guess what I just lost money because the company how to pay to split. But they split stocks for psychological reasons. They split their company's stock because unsophisticated investors think that $50 x 10 shares is cheaper than $25 x 20 shares.

The problem is these people should not buy stocks. Never invest in something you don't understand. By saying the above, you are showing non arm chair investors that you just don't get it....and there's nothing wrong with long as you don't invest!

Furthermore, if you are thinking, well Greggie, I only have $500 to invest in Sirius (or whatever) so it really DOES make a difference to me if the company has enough shares to keep the price below $500.

My answer: Before you buy any investment, you need to consider the administrative cost. If you go the cheap route and trade online, you're going to pay about $20 in commissions. (10 to buy and 10 when you sell). So you need a return of 4% just to break even. The market historically returns an average of 8%, so you'd need 12% return just to "tie" the market!....given that few experts beat the market, it quickly becomes a bad're better off playing roulette.

Don't lose money!....make money. Be smarter than those losing money.


Anonymous Anonymous said...

Why wouldn't I want a stock split as an investor?

Example A: 100 shares of stock at $50 = $5,000. Stock does not split. A week later it goes up $1. I now have $5,100 (100 x $51)

Example B: 100 shares of stock at $50 = $5,000. Stock splits. I now have 200 shares at $25 (still $5,000). However, now one week later it goes up $1. I now have $5,200 (200 x $26). That's $100 more than I made.

What am I missing?

Thu Dec 08, 01:33:00 PM EST  
Blogger Greg said...

you are missing percentages... In your scenario:

Example A: the stock went up 2%.
Example B: the stock went up 4%.

you are missing that the pie is still the exact same size regardless of how many times you slice it. After the split you have twice as many slices that are half as big. 2 x .5 = 1.

(actually you're losing money because you have to pay alot of money to pay to slice the pie).

Thu Dec 08, 01:54:00 PM EST  

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