Why Google’s 95% Drop is Actually a Good Thing

Bryce: [00:00:31] Welcome to get started investing a podcast where we help you learn to invest in 15 minutes or less. Each episode we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you're joining us for the first time, then welcome. We do strongly recommend that you scroll up and start at episode one before you get started. Just a reminder that we are not finance professionals. We are here learning like you, and nothing on this podcast should be taken as advice. So with that said, let's crack on. My name is Bryce and as always, I am joined by my equity buddy Ren. How are you going? 

Alec: [00:01:05] I'm very good. Bryce. Big story we have today. A lot of headlines in financial news. Google fell 95%, but that's okay.

Bryce: [00:01:15] 95%. [00:01:15][0.0]

Alec: [00:01:16] 95%. And it's. [00:01:17][0.9]

Bryce: [00:01:17] Okay. [00:01:17][0.0]

Alec: [00:01:17] That's okay. I mean, look at the tech. The tech sell off started with Peloton and Zoom, but Google now 95% down. [00:01:25][7.9]

Bryce: [00:01:26] Wow.

Alec: [00:01:27] But all is not what it seems. [00:01:28][1.0]

Bryce: [00:01:29] Well, what is it? What is. [00:01:30][1.0]

Alec: [00:01:30] It? That's what this looks like. [00:01:31][1.0]

Bryce: [00:01:32] So we're talking about a stock split in today's episode and using what happened with Alphabet, the parent company of Google last week because they did a 2 to 1 stock split. You may be freaking out if you're have Google or Alphabet in your portfolio and saw a sudden drop in value. [00:01:47][15.5]

Alec: [00:01:48] Yeah. And the lesson that we want to talk about today is what does it mean for investors, not just this Google stock split, but a stock split, a Scotts, but a stock split or a stock consolidation? What should an investor do? What does it mean for tax? But also, if you're an ETF investor, which a lot of us are, even if we don't own Google directly, I guarantee that if you own an ETF, you own Google, what do you do? What happens there? Does it does it affect ETF investors in any way? We're about. [00:02:17][29.5]

Bryce: [00:02:18] To find. [00:02:18][0.1]

Alec: [00:02:18] Out. Let's start with the story. So what happened this week for us? [00:02:21][2.6]

Bryce: [00:02:21] So as I said last week, Alphabet, the parent company of Google, was trading at 2,200 USD a share and then all of a sudden it dropped to 110 points. There's there's the 95% drop. [00:02:33][12.6]

Alec: [00:02:34] Yeah. Market opened on Monday and by. [00:02:36][1.9]

Bryce: [00:02:36] I so if you're looking at the price chart, if you're looking at your portfolio, it's going to look pretty down. However, that is okay because what Google did was they did a stock split, a 22 one stock split. So they took one share and divided it into 20 new shares. [00:02:52][16.1]

Alec: [00:02:53] Yes. So let's say Google had four A's and that's a billion shares on issue and they traded at about $2,200 a share. Then they split each of those billion shares into 20 shares. Yes. So they had 20 billion stock's shares on issue and then they were trading at $110. Now Bryce quick maths. Yeah. A billion times 2200. [00:03:16][22.5]

Bryce: [00:03:18] A couple of tril. [00:03:18][0.4]

Alec: [00:03:19] 2.2 trillion? Yeah. 20 billion times. $110. [00:03:24][4.7]

Bryce: [00:03:25] 2.2 trillion. [00:03:26][0.5]

Alec: [00:03:26] There you go. Same overall market value just divided by 20 times more shares. [00:03:32][6.2]

Bryce: [00:03:33] Yes. And that's how they got to the 110 points as well. 2,200 USD divided by 20 gets you $110. So again, the question is, why would Google and this is not only something that happens with Google, we've seen it happen with plenty of other companies. [00:03:47][14.3]

Alec: [00:03:48] In the last few years. Tesla did it. Apple's done it. Amazon's done it. Berkshire Hathaway. No, but Warren Buffett pays. Yeah. Also, B's have split, but famously A's never split. That's why they're 450,000 about crazy. [00:04:03][15.5]

Bryce: [00:04:04] So, okay, so I guess some big companies have done it. It's not unusual to say there are reasons why companies do it. Yes. [00:04:11][6.5]

Alec: [00:04:11] So the first one is accessibility. Now, $2,200 a share is a lot. Yes. And you have to save up for a long time to be able to afford it. We know that some brokers offer fractional share ownership where you don't have to buy one. She can by zero point something of a share. You can buy a fraction of a share. And so that solves it in some ways, but a lot of brokers don't. So if you split the share, you make $110 rather than $2,000. It's a lot more accessible for people like you and I to buy it. So that's number one. [00:04:43][32.3]

Bryce: [00:04:44] Number two is liquidity. Now, a bit of jargon there, but essentially it means the ease at which you can buy and sell a stock with more stocks on offer. It means that there's more available for rent and I or you guys out there to buy. So the liquidity there's more liquidity in the. [00:05:03][18.6]

Alec: [00:05:03] Market, more shares, moving hands, you and I, rather than owning one share, that's worth $2,000 when we can't sell a bit of it. If we have 20 shares each worth $100, we could sell ten shares if we wanted to. So it just facilitates more shares trading. Yeah, which is good. And then a third reason which isn't in the economic textbooks, you're not going to learn this in finance one on one, but something that. We've seen from the recent stock splits of Apple and Tesla and all of them is that the price has been pushed up, and that's just the psychology of the market. That's not something that you should expect to always happen. [00:05:40][36.8]

Bryce: [00:05:40] No. [00:05:40][0.0]

Alec: [00:05:40] But, you know, it's. [00:05:41][0.8]

Bryce: [00:05:41] A derivative of the first two things. Those things are more accessible and there's a little bit more liquidity than you could assume. [00:05:46][4.7]

Alec: [00:05:47] Yeah, it's also like an expectations game because it happens. Yeah. Then people expect that to happen again, especially like, you know, on social media and stuff like that on Reddit. So don't don't think that that one is always going to happen. [00:06:00][13.2]

Bryce: [00:06:00] No. [00:06:00][0.0]

Alec: [00:06:01] How if you're a CEO and you need to hit your bonus target, it's split your. [00:06:05][3.6]

Bryce: [00:06:05] Stock last night to date. So that's the story. That's the headline. Google 22 one stock split and you will see that reflected in your portfolio. But what does it mean for Google shareholders? Do I need to do anything? Should I be concerned? [00:06:17][12.6]

Alec: [00:06:18] Here's the lesson, because if you're a long term investor, you are going to come across a stock split or a stock consolidation in a company that you hold. Yeah, it's just it's going to happen. So what do we have to do? [00:06:28][10.4]

Bryce: [00:06:29] Not a lot. [00:06:29][0.3]

Alec: [00:06:30] That is the great thing is you don't have to do much. And it's it can sound daunting. They make it easy for you. [00:06:36][6.2]

Bryce: [00:06:36] They make it easy. So it's not often you have a lesson. You're sitting in class and the teacher says, there's not much we have to do here. Yeah. [00:06:43][6.6]

Alec: [00:06:43] It's pretty good. Yeah. Good day. [00:06:45][1.6]

Bryce: [00:06:45] Good day. So not not much happens. Not a lot really changes as you for you as a Google shareholder, the value of your position, I think this is the first thing to consider does not change. If you had $1,000 invested in Google and they do a stock split, you will still have $1,000 invested in Google. It will just be across more shares. That's the simplicity of it. The percentage ownership of the company will not change. [00:07:11][25.5]

Alec: [00:07:12] The if we owned 0.00003% of the company, that's probably it's a loss. We still own 0.0003% of the company just across more shares. That's it. So the dollar amount that you invested doesn't change and the percentage of the company that you own doesn't change. And they're really the two important things. Yes. How many shares that's divided into is just. [00:07:35][23.2]

Bryce: [00:07:36] It's yeah, it's it's it doesn't make any difference to you as an investor. Some jargon coming up. Your cost base will not change. What that means is if I invested in at a particular price or I invested a thousand and it's now worth 2000, that initial cost base that a thousand that you went in will not change. [00:07:56][19.7]

Alec: [00:07:56] Yeah, and that matters for tax reasons. But before we talk about tax, one last thing that you don't need to do. You don't need to do anything extra to claim your shares. Yes. You don't need to write to Google and ask. You don't need to notify your brokerage account that there should be shares in coming by this point. By the time you're listening to this episode, you should be able to just go into your brokerage account and see 20 times more shares and a much lower share price up on. Honestly, it should have happened really the day the stock split. Brokers move pretty quickly these days. Yeah, that's the key thing. You don't need to do much, but a lot of the questions that we get and a lot of the confusion comes around tax. Yes. Now we know there's a global audience on get started investing. So we need to speak in generalities and we need to be clear that you need to get your own tax advice. [00:08:43][46.7]

Bryce: [00:08:44] Yes. [00:08:44][0.0]

Alec: [00:08:44] But but there was a good article and share site that sort of explained the simple philosophy behind it. And as you said before, your cost base does not change. So if you bought ten shares at $100 a share, you spent $1,000 on shares. The company does a two for one stock split. You own 20 shares with a cost base of 50, but there's still $1,000 that you spend. So when you report for tax time, if you sell the whole amount, well, your cost basis, $1,000, that's if you sell part of the amount, your cost base is that whatever the split adjusted a cost basis. So 20 shares at $50 a share. So for Google, if you bought one share at $2,200, it's now 20 shares at $110. And you sold half of them. What would you cost base? [00:09:37][52.2]

Bryce: [00:09:37] But give me the maths again. [00:09:38][1.6]

Alec: [00:09:40] So you've got one share. $2,200. [00:09:41][1.2]

Bryce: [00:09:43] Yeah. [00:09:43][0.0]

Alec: [00:09:44] And then Google does a 20 to 1 stock split. Yeah. If you sold the whole amount. Yeah. Let's say it was to you sold the whole amount for $2,300. Well you made 100 bucks. Yeah. Easy to report. Yes. What if you sold half of your shares now that you have 20 of them. [00:10:00][16.1]

Bryce: [00:10:00] Same thing. Like your cost basis is going to be half of 2200. [00:10:03][2.9]

Alec: [00:10:04] Yeah. [00:10:04][0.0]

Bryce: [00:10:05] What, 1100. [00:10:05][0.3]

Alec: [00:10:06] Right. So that's, that's really how you think about it for me. Yeah. But obviously tax laws change in different countries and you need to get your own tax advice before you file. [00:10:19][12.4]

Bryce: [00:10:19] Yes now. And UNsponsored plug. But I do use share site. They're a great tool for tracking. They make all of this work very easy for you be. Because they'll recognise that there's a stock split and you just click the button and it'll then readjust your cost basis accordingly. So from a tax point of view, you don't even have to get in and change your xcel's not adjusted cost basis, but adjust your you're you're tracking your your cost per share, all that sort of stuff so you don't even have to adjust your. [00:10:45][26.2]

Alec: [00:10:45] I don't think brokers do that as well. Yeah. [00:10:47][1.4]

Bryce: [00:10:47] But from a. Yeah they do. They do. That's true. But if you have multiple brokers, hey. [00:10:52][4.9]

Alec: [00:10:53] Let's keep it moving. What does it mean for ETF investors? And I think where we want to start here is that if you don't think you own alphabet, you probably. [00:11:01][7.6]

Bryce: [00:11:01] Don't think again. [00:11:02][0.4]

Alec: [00:11:02] If you own a global ETF like an MSCI all world index. [00:11:06][3.6]

Bryce: [00:11:06] Yes, you own it. [00:11:07][0.7]

Alec: [00:11:07] If you own an S&P 500. [00:11:09][1.6]

Bryce: [00:11:10] You own it. [00:11:10][0.4]

Alec: [00:11:10] If you own a Nasdaq 100 ETF, if you own it, if you own any global or American tech or software ETF with confidence. [00:11:18][7.4]

Bryce: [00:11:18] With most confidence, I'd say you own it. They'd probably be some niche, but broadly, yes. 

Alec: [00:11:23] Same if you own a growth ETF. 

Bryce: [00:11:26] Yeah. 

Alec: [00:11:26] Pretty sure these days if you own evaluate here.

Bryce: [00:11:29] Interesting. 

Alec: [00:11:30] Not sure if you own it. ESG ETF. 

Bryce: [00:11:33] Oh yes.

Alec: [00:11:35] If you own like a general one, generally those tech. Yes. Get in. They wouldn't be in like a wind power, you know. 

Bryce: [00:11:41] And they'd be like global sustainability leaders. 

Alec: [00:11:44] Yeah, yeah, yeah. Ethically responsible. Yeah, yeah. You got you got it. Anyway, look, I think the point is that Alphabet is a pretty core holding in most ETFs and managed funds and everything. So for those of us that aren't native, what do I need to do? 

Bryce: [00:12:02] Same thing Ren. If you own, if you're an individual investor, the same thing applies as if you're an ETF investor. Nothing. Yeah, nothing changes. 

Alec: [00:12:11] If it was possible to need to do less, you would need to do less because the ETF issuer, doesn't it for you know, let's let's explain. So let's say you own and ETF and in that ETF there's 100 alphabet shares. Yeah the that ETF after the stock split will own 2000 alphabet shares. Yeah. But as a percentage of the ETF like let's say it's 5% of the ETF that should remain 5% of the ETF. Yeah. Your cost basis in buying the ETF doesn't change the number of ETF units you have. You know, like the shares of the ETF that you have doesn't change. Doesn't change. They don't get split. There's no tax implications because you are buying and selling the units in the ETF and the price in the units of the eighth matters, not what's going on on the day. Yes. ETF issue. It deals with all of that. 

Bryce: [00:13:02] Yes. So I'm getting a whole lot of sense here and that this whole scenario is a whole lot of nothing. 

Alec: [00:13:09] Yeah.

Bryce: [00:13:10] No, that's good. That is. 

Alec: [00:13:11] Good.

Bryce: [00:13:12] It's a whole lot in nothing. But if you can if you watch the headlines, you might think it's a whole lot of something.

Alec: [00:13:18] Yeah, it's a whole lot of headlines. 

Bryce: [00:13:19] Yes, it's a whole lot of headlines. 

Alec: [00:13:21] And not a lot of paragraphs.

Bryce: [00:13:24] Not a lot of substance. 

Alec: [00:13:25] Yes. So so yeah. I think I think that's our key takeaway. You probably saw the headlines. You will see the headlines again. Google is the example this week, but it's okay. It's a lot of noise. Yeah, there is an opposite of a stock split, a stock consolidation. Google split their shares because it's too high and it's inaccessible. Some companies will say our share price is too low. We need to consolidate. So rather than doing a 24 on split, they might do a 24 on consolidation and that's when you stocks in like the sense yes like the if you stock's. 

Bryce: [00:14:01] Trading at minus. 

Alec: [00:14:02] If you stocks trading at $0.02 you might do a ten for one consolidation. So it's trading at $0.20 and that's because stock's trading that low. There's a stigma around. Yeah, and you know you're not buying a two cent stock unless. 

Bryce: [00:14:16] It's back. 

Alec: [00:14:17] In the guy. Yeah. 

Bryce: [00:14:19] But I think the same thing applies there though that nothing changes for you as an investor, or at least nothing that you need to do or be concerned about. 

Alec: [00:14:28] Yeah. The value of your investment doesn't change. The percentage ownership of the company you have doesn't change. It's just the number of shares that that value or that ownership stake is split across. 

Bryce: [00:14:39] Yes. Yeah. So Ren, just like a lot of things in investing, it can seem daunting and overwhelming and confusing, but when you break it down, there's a whole lot of nothing. 

Alec: [00:14:49] Also now Bryce one thing before we leave, you know that joke when the iPhone came out, there's an app for that. Yeah. And, you know, it's like, oh, there should be an app for running backwards down here. Yeah, yeah, there's an app for that. Yeah. And then in the podcasting world, there's a bit of a joke. There's a podcast for that. Yes. And there's just so many podcasts out there. I think we should coined the term. There's an ETF for that. Okay. Because the amount of ETFs out there is crazy. Yes. And so I wasn't surprised to see there is an ETF that tracks companies splitting their stock. Oh, my goodness.

Bryce: [00:15:25] So what a stocks a company comes in. Stock gets put into the ETF. 

Alec: [00:15:29] A company announces it splitting stock and then it gets put in. And then I think it's in there for like six months after the stock to. 

Bryce: [00:15:36] Capture the upside. 

Alec: [00:15:37] Yeah. Yeah. It's it's just like it's like. 

Bryce: [00:15:40] Well, it doesn't no one needs to know. And it's that anyway. 

Alec: [00:15:45] But here's the ticker. It's over in the U.S.. Too far. No way. Far too far. Cause I feel to for. 

Bryce: [00:15:55] You got to respect the the naming conventions for some of these guys. But look at that is an ETF that you're right the world definitely does not need. 

Alec: [00:16:03] Yeah, we don't give investment advice on the show but advice to the ATF issue. Did the world. 

Bryce: [00:16:10] Socket socket energy going into that would have been too much focus on other things. 

Alec: [00:16:16] Imagine if that was your job trying to market that. It's like I know anyway. But hey, we said that alphabets in every ATF alphabet will be in this one as well. That's true. 

Bryce: [00:16:27] That is true. Anyway, that brings us to the end of this episode of Get Started Investing. Hopefully we've been able to add another piece to your investor toolkit. And if you were one of those investors who had Alphabet in your portfolio and were wondering what was going on, I hope we've been able to make it clear why you would have seen a bit of a drop. So we'll be back next week with another news story from around the world in in markets to help you become a better investor. But ran it's been great we'll pick it up next week. 

Alec: [00:16:54] It sounds good.