Google parent Alphabet announces a 20 for 1 stock split
Tech sectors around the world have been in the news of late, as the stock price of many major technology companies have been falling.
The big news this week is that Google's parent company, Alphabet, has announced a 20 for one stock split, as they wanted to make the share price more affordable to the masses.
On the surface this may appear as though Google is being nice to retail investors but don't be fooled. If you own XYZ Company and the stock is trading at $10 and it does a four for one split, then you have four shares at $2.50, which means the value you own remains the same, as you still own $10 worth of shares.
What Alphabet is betting on, however, is that retail investors mistakenly look at the stock's price and think it's cheap given that it is currently trading around $2861 per share (as of writing) and, therefore, buy it to take the price higher.
This is because following the 20 for one stock split each Alphabet share will be worth around $143, although, once again, the value to the shareholder remains the same, they now just own more shares. Interestingly, only eight trading days ago Alphabet was trading down more than 15% from its high on 19 November 2021 but following the announcement it quickly reversed and traded back above the high. So, in essence, Alphabet achieved exactly what it wanted, a higher stock price.
It is common for investors to only look at the price of a share to determine if it is cheap or expensive, which is a flawed approach but it does explain why so many speculate on penny dreadful stocks only to lose. The fact is that when the stock split on Alphabet occurs, the value of the shares will remain the same as it did the day prior.
To really assess the value of a stock, you need to look at what the company is worth and then compare it to the current share price because a $0.10 cent stock is very expensive if it is only worth $0.01 and a $100 stock is very cheap if it is worth $200. Something to keep in mind before purchasing the next penny dreadful.
The best and worst performing sectors this week
The best performing sectors this week include Energy and Utilities, which are both up more than 3% followed by Consumer Discretionary, which is up more than 2%. The worst performing sectors include Information Technology, which is just in the red followed by Financials and Consumer Staples, as they are both just in the green for the week so far.
The best performers in the S&P/ASX top 100 stocks include Mineral Resources, Fortescue Metals and QBE Insurance, as they are all up more than 8% followed by Orica, ResMed, Computershare and The Star Entertainment Group, which are all up more than 6%.
The worst performing stocks include Ansell down more than 17% followed by Brambles down more than 5% and Commonwealth Bank down more than 2%.
What's next for the Australian share market
After falling 11.62% January 5-27, the All Ordinaries Index has been more positive this week rising around 1.5%. So, is the down move over or can we expect more downside?
The answer to this question is currently unconfirmed given that a few days of trading in any direction is not confirmation that a new trend is unfolding, which unfortunately is when investors tend to jump into stocks or markets too early only to get burnt.
While the stock market did trade down very close to my target level for the fall, my position is to always err on the side of caution and assume that there are further falls to come. I say this because markets and stocks will always move in the opposite direction to the prevailing trend for short periods of time.
Given this, I still believe it is possible that the All Ordinaries Index could fall below 7000 points and may fall to as low as 6800 points over the next few weeks. That said, investors should be getting excited, as I believe once we can confirm the low our market will perform very well this year.
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