Google

A gentle reminder that stock splits basically don’t matter and, no, Google hasn’t robbed you of voting rights.

On Thursday morning Google started trading post-split, as explained in this post from Derek earlier in the day. I’m a Google shareholder, and instead of having shares worth over $1,100 each I have twice as many shares trading at half that price.

I think it’s important for people to have a basic understanding of how the stock market works, because investing in the market for the long term is one of the best ways to ensure you have plenty of money later in life. But too many people get caught up in the day-to-day gyrations of the market instead of focusing on making investments in great companies for the long run.

It isn’t going to change anything in the long run

I happen to think Google is one of those great companies. I’ve been a shareholder for many years, and I plan to be a shareholder for many more years. But as far as the stock split goes? It’s pretty much a non-event to me. I couldn’t care less.

More pieces of the same amount of pie

All a stock split means is that your shares get cut in half. Imagine that you and three friends split an extra-large pizza evenly. It doesn’t matter how many pieces your quarter is cut into. You’ll still be just as full (or hungry) when you’re finished eating. No-brainer, right?

Academics can argue about signalling theory or other psychological aspects of trading around a stock split. I think it’s a waste of time. It isn’t going to change anything in the long run.

Fight for your right to misunderstand

Now let’s talk about voting rights, because there are a lot of confused people out there.

Your voting rights have not changed

As Derek explained, Google did this so that founder and CEO Larry Page and co-founder Sergey Brin would maintain more voting control of the company over time. The founders hold multiple voting shares known as "Class B" stock. Regular investors who held regular voting stock seem to think that the creation of "Class C" (non-voting) shares robs them of their voting rights.

It’s not true. Shareholders still have exactly the same number of votes today because they still own a Class A (voting) share for every pre-split GOOG share you owned. The number of voting shares also has not changed. If the numerator and denominator have not changed, then guess what boys and girls?

Your voting rights have not changed. This fact, unfortunately, won’t stop people from misunderstanding what is happening.

Don't like it? Sell your stock

Here’s another tidbit for you. If you hold "Class A" shares, your voting rights are also preserved — just like Larry’s and Sergey’s. This is because future share issues (for stock compensation and acquisitions) will be mostly non-voting stock. The only people who lose voting power are future shareholders of the new Class C stock.

But it’s all irrelevant. Yeah, it’s nice to have voting power. But in reality if a company is doing dumb things, which am I more likely to do:

  • Go complain at the annual general meeting
  • Or sell my shares and invest in a company that isn’t doing dumb things?

If you voted “B”, you win.

So when you invest, just pick great companies and ignore stock splits. They really don’t matter.

 
There are 17 comments

tdizzel says:

They didn't rob me of my voting rights, but they did rob me of my dignityyyyyyyyy!!!

thaphoenix2 says:

Couldn't have been made any more clear.

Posted via Android Central App

Justin Stepp says:

Saying stock splits mean nothing is dumb. They do make a difference and allow investors to buy up more shares at lower price before the stock price climbs back up. Which it will.

Posted via Android Central App

planoman says:

Don't tell Berkshire Hathaway Class A shares...but I agree with you. I was able to increase my position in class A shares today because of the lower price. Hopefully it will track like historical data!

uansari1 says:

I think your understanding is a bit lacking. Rather than considering the number of shares, you should be considering the value of your investment. This is best explained by illustration...If GOOG is trading at $1,000 per share and there's a free float of 1 million shares, then the total value of the float is $1 billion. Let's say it splits 2:1. Now the value per share is $500, but the float doubles to 2 million. Guess what... total value of the float is still $1 billion. Similarly, if you purchase 100 share pre split, you've invested $100,000. Post split, you have 200 shares that are...you guessed it... still worth $100,000.

The stock price is actually a measure of market perception of the company's value, and that will not change with a split. Rather, a split simply allows people a finer level at which to allocate their trading in a particular stock. If I have $1,500, I could buy 1 share at $1,000 pre-split, and the rest of my cash is unutilized. After the split, I can buy 3 shares at $500 each, and can benefit from full utilization of my cash. A split makes an equity investment more accessible to a greater number of investors. I'll save my spiel on reverse splits for another time.

Justin Stepp says:

No crap Sherlock but $500 a share is a lot more affordable than $1000. It's easier for more entry level investors on a budget to buy Google shares is my point. And over time the Google shares will be going back up by the end of the year. What the stock split means is that it's a great time to buy if you don't own Google stocks.

Posted via Android Central App

uansari1 says:

You missed my point...the investment isn't any more or less attractive because of the split. It's still the same company with the same market capitalization and earnings. I don't think it's going to go back to $1000 per share any time soon.

Posted via Android Central App

Justin Stepp says:

It is a lot more attractive for someone who doesn't have as much capital for investing is my point. $1200 was a very hefty price tag on one stock and long term wise I would put my money on the stocks going back up over a thousand dollars (maybe not this year) unless they decide to issue a whole bunch more stocks which it sounds like the only stocks they would issue at this point is class c since they are trying to retain voting control over the company.

And you may not see the stock price going back up to over a thousand but that is just my predication. I see Microsoft falling by the end of the decade and Google stepping up to dominate the consumer market. Their chrome book line continues to grow, they just bought the largest robotics devoloper for the us military, and Google glass is just around the bend. All revolutionary technologies looking to change the next decade.

Posted via Android Central App

planoman says:

Sold my dividend class C shares this morning at 580's and bought class A shares later in the day for for about $10 a share less...wish I could say it was planned but it just worked out that way... For some reason I wanted class A for the long term. I guess I think that because of BRK-A vs BRK-B lol!

pheatton says:

The company I work for has been around for over 100 years and has been traded for around 40. Its stock has never split for a reason. By not splitting we keep the trading volume low which keeps the price up. Some very large and profitable companies do this.

So this really depends on what the board and CEO wanted to accomplish with the stock split. The article is very on point and if your wondering the company I work for is worth just shy of $8.5b.

Posted via Android Central App

Jet300 says:

All I know is Google needs to invest in some new signage. That Building B44 sign looks worse looking with each Android statue release....

Nathan Bael says:

The lawn has a lot of dead spots as well.

cvmaas#AC says:

The lower price does nothing to change your position in an investment, your position should be based on percent of total holdings allocated to a particular company or sector. $1,000 in 1 share, or $1,000 in 100 shares will bring the same return long term. The split doesn't do much to change volatility, any amount of money most of us posting can invest pales in comparison to hedge funds and retirement funds, they are the ones who drive the price. The company my wife works for, splits about once every 2-3 years, and is much less volatile than others in their sector. Old companies (around for over 40 years) don't change up much, so their valuation has little need to swing wildly, they are stable, not high growth. Dump your 100k in Google holdings, and the price won't budge down, it's not enough to move the market. (I picked those arbitrary numbers only to point out that if you don't care about voting rights, only total return on investment, long-term, in the money options brings serious leverage to your position [1 option contract is to buy 100 shares]) The lower stock price does make these options a bit more affordable. There is one point missing in all of this, issuing new shares (the Class-C) dilutes your position regardless of voting rights. If they sell 500m in new stock, and the company didn't magically come up with a new revenue stream, the valuation will go down. Yes today was a good day, but once the hype dies down of the consumer investor buying up the new shares, the price will depress (short term at least) as a result. Today every mini-investor saw the news and jumped at the chance to buy as they couldn't afford to drop 1k at a time buying a share, that volume won't last.

Nathan Bael says:

Stock splitting does lower the barrier to entry for a lot of investors. I'm not talking those investing 10's of thousands of dollars at a time, I'm talking about those investing just one or two thousand.

bm13084 says:

Split, but I still can't afford it :-/

TenshiNo says:

Ditto, man. Don't feel too bad.

drazum77 says:

Thank you Chris, great article explaining what happened. To celebrate tonight, I'm ordering an xl pizza and splitting it into 32 slices :_)

Posted via Android Central App