The valuation influence of stock liquidity and stock split on listed companies

Liquidity of stocks in the market

For a long time, Warren Buffett’s Berkshire company stock has been poorly rated (I didn’t write it wrong, no one should be surprised). One of the main reasons is the poor liquidity in the market, that is, very few people trade the stock. Although this is mainly caused by Buffett’s intention, because he only wants long-term investors to own Berkshire stocks. But Berkshire is a publicly listed company after all, and this has caused many unexpected consequences.

Apple (ticker: AAPL) has an average daily trading of 81,429,514 shares, and Microsoft (ticker: MSFT) has an average daily trading number of 23,101,465 shares. Like this stock with good liquidity, there are people trading at any time. Spree is very small (that is, price transparency), investors are unlikely to be taken advantage of by others. Berkshire’s A stock (ticker: BRK.A) has an average of only 11 shares (I did not write it wrong), and Berkshire’s B stock (ticker: BRK.B) is not as good as that, even if its stock price is very close to the people. There are only 4,143,110 shares ────Don’t forget that Berkshire is the top ten listed company in the US stock market by value! Even Visa (ticker: V), which has a market value similar to Berkshire but a bit lower, has 7,627,371 shares. From this we can know how low Berkshire’s trading volume has been in the previous era when Berkshire had only A shares.

Benefits of higher liquid stocks

The advantage of investors having stocks with good liquidity is that the price is transparent, there is almost no unreasonable price difference, it is unlikely to be manipulated by the market, easy to exit, the market crash or the decline in the case of a large correction will be relatively low. Because someone is willing to take it at any time. The more important point is — Generally speaking, stocks with higer liquidity is better for companies with good prospects or good optimism. This reflects the preferences of investors; because no one will trade companies with no prospects stock.

No one likes poorly liquid stocks

Apple, Microsoft, and Visa are among the 30 constituent stocks of Dow Jones and are also constituent stocks of countless ETFs. But Berkshire is not! There is no other reason, because no one likes it, and adding it to it will not help — the trading volume is small and the price is not transparent, and investors don’t like it. Wall Street hates this stock, and market makers don’t like it because they cannot profit from poorly liquid stocks. This is the basic business logic (this does not harm Buffett’s position in investment history, nor does it affect Berkshire’s market value; because these are two things).

Consequences of poorly liquid stocks

This is one of the reasons why I hardly encourage investors to hold stocks in unlisted, very small companies, or very small market capitalizations. Because the liquidity of these stock is very poor, few people buy and sell, and the price fluctuates greatly. It is easy for investors to buy at a premium because you have few choices.

This is not the worst. When you want to get out, you won’t find someone to take over. In the end, you can only get out of it at a very low price. All you have to do is to look at the stock market crash, these stocks are falling far more than the average of the market, often no one bids at all, because at this time no one wants good stocks, let alone such stocks with poor liquid.

In the long run, the final consequence of poorly liquid stocks usually becomes the target of shorting, the stock price is getting lower and lower, or it becomes the target of mergers and acquisitions of condors (provided that it has some value). In the long run, this kind of stock will have only one outcome, that is, it will be delisted for various reasons, no matter in which stock market in the world, too low stock trading volume is a hard demand for delisting, and there is no room for negotiation.

Stock Split

This is also the main reason why listed companies are willing to carry out stock splits. As long as listed companies announce stock split plans, there are almost no exceptions, which will definitely cause the stock price to rise in the next short period of time, and after the stock price split becomes cheaper, small shareholders and retail investors will definitely There will be more, so that the liquidity of the stock can be greatly increased. In 2020, Tesla, Nvidia, and Apple have carried out a stock split plan of 5 for for 1 , and 4 for 1, and 4 for 1 respectively, as well as Alphabet and Amazon’s share price of nearly US$ 3,000 this year, both announced plans to of 20 for 1 stock split . Aside from the short-term rise in stock prices caused by this, in the long run, it will increase the liquidity of the stock and the upward momentum of the stock price. Interested readers can refer to my book “The Rules of Super Growth Stocks Investing” Chapter Chapters, 5-6, discussed how stock splits affect a company’s long-term stock price.

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