Ask the Fool: Reverse splits
Q. Is it OK if a company does a reverse stock split? — C.I., Syracuse, New York
A. It’s generally a red flag, as reverse splits are often executed by struggling companies. With a regular stock split, you end up with more shares, priced proportionately lower. But a reverse split does the opposite, propping up the stock price (which can make the company look better) while shrinking the number of shares.
Imagine Scruffy’s Chicken Shack (Ticker: BUKBUK), trading at $5 per share. If you own 200 shares, they’re worth $1,000. If the company executes a 1-for-10 reverse split, you’ll end up with 20 shares, priced around $50 each. The total value of your shares remains the same — $1,000 — both before and after the split. All that happened is that the company increased its stock price by decreasing its number of shares.
Some reverse splits happen so companies can avoid being delisted from stock exchanges that require minimum price levels.
If you notice that a troubled company’s stock is suddenly trading at a much higher price per share, it might mean that a reverse split has occurred — not that the company has pulled off a remarkable turnaround.
Q. What’s “algorithmic trading”? — J.S., Gainesville, Florida
A. It’s when computers — not humans — are placing buy and sell orders in the market, and they’re doing so based on certain algorithms — sets of predetermined rules. The aim is to make money via fast-paced and frequent trading. Algorithmic trading can influence stock prices and market volatility, which can also affect us small investors.
Fool’s school: Understanding brokerage orders
Once you have an account at a good brokerage and you’re ready to buy (or sell) stocks, you’ll need to understand the different kinds of orders you can place. Here are the main ones:
- Market order: A market order executes your trade as soon as possible, at the best available price. If placed during trading hours, it might execute within seconds. This order generally guarantees execution, but not price. It’s good to use if you simply want to buy or sell a certain stock at close to the current price. It’s not a good kind of order if the stock is fast-moving or doesn’t trade often.
- Limit order: This order typically guarantees a certain (or better) price, but not the execution of the trade. With a limit order, you indicate that you want to buy or sell a certain security at a specific (or better) price. If the security never reaches that price before the order expires, the transaction won’t happen.
- Day limit order: This order will remain in effect only for the current trading session.
- Good-till-canceled (GTC) limit order: This kind of order will stay in effect until it’s filled, you cancel it or it expires. (These orders generally expire after two to six months.)
- Stop order: This order is a market order in waiting. It’s triggered only when a stock hits a price you specify, at which point it becomes a market order. You might use it if you want to sell a stock if it falls to a certain price, though you’re not guaranteed a certain sale price.
- Stop-limit order: This order becomes a limit order, buying or selling at a specific (or better) price only if the security falls or rises to that price.
Learn more about each of these orders if you think you might use them. But for many investors, simply placing market orders can be fine.
My dumbest investment: Sold Nvidia too soon
My most regrettable investing move was selling my shares of semiconductor company Nvidia too soon. — A.K., online
The Fool responds: Ouch. You didn’t say when this happened, but for illustration purposes, let’s say you bought around 10 years ago, in May 2014, paying roughly a $4.64 (split-adjusted) price per share. If you sold five years later, when shares were trading around $39 per share (split-adjusted), you’d have enjoyed a gain of more than 780%, which was about 55% on an annualized basis. That’s excellent!
Of course, five years after that, Nvidia shares were trading near $950 per share. If you still owned them, your total gain would have been around 21,000%, or more than 70% per year on average. Nvidia has been one of the best performers in the past decade, and many expect continued growth from the behemoth, as it has expanded from specializing in gaming chips to much-in-demand artificial intelligence (AI) chips.
With great companies, it’s usually smart to simply hang on for many years, despite occasional downturns or sluggishness. As long as you remain confident, hang on. If you’re not confident of the company’s growth prospects, though, selling can be the right move.
(Do you have a smart or regrettable investment move to share with us? Email it to [email protected].)
Foolish trivia: Name that company
I trace my roots back to 1931, when a guy in Arkansas started delivering chickens. By the 1940s, I was selling chicks and feed, too. I entered the 1990s as the world’s largest fully integrated producer, processor and marketer of poultry-based foods. I bought beef and pork giant IBP in 2001. Today, with a recent market value near $20 billion, I’m a global food giant, featuring brands such as Aidells, Ball Park, Bosco Sticks, Hillshire Farm, Jimmy Dean, Sara Lee Premium Meats, State Fair and Steak-EZE. I employed 139,000 people as of September 2023. Who am I?
Last week’s trivia answer
I trace my roots back to 1799, when founders including Aaron Burr and Alexander Hamilton launched The Manhattan Company to supply clean drinking water. It ran a banking operation with the surplus capital and funded the Erie Canal in 1817. I’m now the result of joining more than 1,200 institutions — including Bank One, Manufacturers Hanover Trust and Chemical Bank — over many years. With a recent market value of over $580 billion, I’m a premier global financial company, recently with $4.1 trillion in assets and more than 240,000 employees. Who am I? (Answer: JP Morgan Chase)
The Motley Fool take: Bonds, total bonds
It’s often recommended that we own both stocks and bonds for diversification. But as retirement nears, think harder about bonds.
Bonds are essentially loans: Investors lend money to companies, local governments or the federal government, and in exchange are typically promised interest. The safer the bond issuer, the lower the interest rate: U.S. government bonds are considered very safe and tend to offer relatively low interest rates, whereas bonds from shaky companies are referred to as “junk bonds” and often use higher interest rates to attract buyers.
The old-fashioned way to invest in bonds was to buy individual bonds. U.S. Treasury bonds are available at TreasuryDirect.gov, and you can buy most other bonds via a brokerage account. But many people don’t feel confident enough to select bonds on their own, and they may not be planning to hold them until maturity, either.
A solid alternative way to invest in bonds is via a bond mutual fund or an exchange-traded fund (ETF) — a mutual fund-like security that trades like a stock. One highly regarded bond ETF is the Vanguard Total Bond Market ETF (BND). It charges an ultralow “expense ratio” (annual fee) of 0.03% and recently sported a yield of 4.7%.
The Vanguard Total Bond Market ETF is highly diversified (different bond categories, sectors and maturities), as it encompasses more than 11,000 bonds, and roughly two-thirds of its holdings recently were U.S. government bonds.
So consider including bonds in your portfolio mix, especially if you’re approaching retirement.
(The Motley Fool owns shares of and has recommended the Vanguard ETFs we’ve shared here.)
— distributed by Andrews McMeel Syndication
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