You NEVER stop learning now do you!

Beginner Questions
1

This won’t interest most here (but it will interest some here that know me).

For some reason (which I attempted to explain on another thread last week) I still watch the price of CitiGroup. I noticed, two minutes ago, that CitiGroup was trading at around $40 per share and last week (and for a few years now, since sub-prime and the credit-crunch) it’s been trading at or around $4 per share!!! At first I thought there was something wrong with my price quotes!!! But check this out the attached .PDF file entitled ‘Citigroup Instantly Becomes a $40 Stock’

I was speechless. I didn’t know that such manipulation of the numbers was possible (although it’s pure math and merely symantics of course).

Regards.

Dale.

Citigroup Instantly Becomes a $40 Stock.pdf (183 KB)

2

They want to attract more institutional investors. The previous range it was in (<$5) meant that it was classified as a “penny stock” and as a result couldn’t be picked as an investment by some large hedge funds and mutual funds who have prospectus rules against investing in those stocks. Now that they’re magically up over the $40 mark they’re eligible for investment.

3

That’s one reason I almost never invest in stocks anymore. I still have some inventories like old and good wine, lol. But I do not buy new stocks anymore. They can split how they like and do other nasty things. Like say they split not an even round number, but something odd. Then they pay all what is a modulo in money, because you can not have a fraction of a share. If they do it often enough, you get paid and paid, the share value shrinks and if they have you pushed away the stock will launch. Or they do it after a drop and you have serious losses. Not to say I had that often. Just once or twice and not with a very heavy investment. Anyways, those things are possible.

4

That’s what you were talking about in the thread I started if I’m not mistaken! That’s incredible and ironic that it happens now just as you were discussing it. Too bad I can’t read the whole article, WSJ just gives me a little stub if I don’t subscribe… oh well! So if I understand correctly(from the small part I was able to read) all the stock holders still have the same value in stocks but the number of stocks for that value has diminished significantly… correct?

5

Yep. The number of shares was reduced by a factor of ten so the share price went up the corresponding amount. Nothing has essentially changed for the shareholders. It was done so they could attract a certain group of institutional investors as Citi has a relatively low % of those types of investors compared to the likes of JPM for example. It does give the appearance of being a bit of a trick though and history would suggest that it can cause the price to sell off some initially but it’ll probably prove an ok move over time if they end up with the investors they want.

6

Good morning everyone.

That’s exactly what I thought last night (Anita V) when I started this thread. How ironic (the timing of this)!!! I also (for you) just checked that link that I posted. Very odd!!! This morning: the same thing for me i.e. I could only read the introduction but in order to view the entire article I was being asked to subscribe and I SWEAR to you I was able, last night, to read the entire article (I don’t subscribe to the WSJ). But I’ll try and find another article for you on the subject as there ware some great detail there (I DO subscribe to the New York Times so I’m sure there must the a similar article there). Anyway: I’ll find one and post.

Buckscoder and PipBandit:

The reason CitiGroup has always been of such significance to me is because it was but ONE of the financial stocks that I kept ‘buying on the dips’ on the way down at the start of the sub-prime crisis. I bought somewhere around 50$, goodness knows how many times I added to the position, and was margin called when it got to around $5 or somewhere around there (a major contributing factor to my ‘spectacular wipeout’). So I keep CitiGroup on my price quotes just to REMIND me to NEVER make the same mistakes again. That type of thing. There is another reason and that is the fact that it’s one of the most heavily traded stocks (volume) on the NYSE. I wonder if that’s going to change now???

If I’m not mistaken: CitiGroup was a Dow component (or was it only an S&P 500 component)??? I forget now. I seem to remember there being much debate as to whether or not it was removed because it’s price was under $10 (which, if I remember correctly, is the ‘bottom line limit price’ i.e. anything under $10 is considered a penny stock and therefore cannot be included in the indices but CitiGroup, for a time anyway, was allowed to be an exception if memory serves me correctly).

(I’m rambling. Sorry).

Here’s what I’d like to know:

COULD this happen or be done with ANY stock even if it’s NOT a penny stock and is a Dow or S&P 500 component and, if so, would this not (falsely???) have an effect on the price of the index???

Also: I wonder if this means that CitiGroup will be added back to one of the indices (and of course somebody else then has to be removed).

And as I said: you never stop learning in this business. This is something that I didn’t know was possible. If you think about it LOGICALLY: the share price of any company is supposed to be indicative of, or reflect, the ‘fair value’ of such company. So if you were a NEW investor LAST week and decided to buy CitiGroup and you were a NEW investor this week MONDAY you’d be seeing two totally different pictures while nothing REALLY has changed??? Would that be a fair assumption to make???

There’s something else here that’s confusing (or worrying). How would the brokers have handled this??? I mean let’s just SAY that you were ‘loaded up’ on CitiGroup at $5 and that required X amount of margin. LOGICALLY speaking: the amount of margin required would have instantly been increased ten fold and if you were ‘flying close to the wire’ (like I used to trade???) not only could this result in a margin call BUT all of the sudden the tick value would ALSO have increased not so??? So how can this ‘just be allowed to happen’ or authorised??? The only alternative would be to reduce the position size by ten fold???

Also and in light of the above: could this also not be a reason for an initial selloff i.e. some traders or investors would be FORCED to liquidate their long positions because of the increased margin requirement.

I mean: it’s the same as me selling a car to somebody for $10 000 today, completing the transaction amicably, and going back to the buyer two years later and asking them for another $90 000 (to total $100 000)??? Come think of it: ‘asking’ isn’t the right word i.e. I would be ‘forcing’ the buyer to pay me another $90 000 or take SOME of the car back (reduce the position size)???

Your input would be greatly appreciated.

Don’t you just LOVE this business??? LOL!!! I do (quite possibly because I know there’s some new bit of knowledge or a new experience ‘coming my way’ from ‘just around the corner’ at any time)!!! LOL!!!

Regards,

Dale.

Edit (for Anita V):

‘You cannot keep a good man down’!!! LOL!!! For some obscure reason: when you follow a link from Google to the article you have full access but if you go DIRECTLY to the WSJ website you are only able to see the introduction. So I’ve converted the full article to an Adobe .PDF document and attached it to my first post (and edited the post accordingly).

7

I’m not 100% on this, and I’m retrieving some very old files from the depths of the grey matter but:-

You can reprice any share, and you can go either way i.e. make 2 shares worth 1 and make 1 share worth 2. The complexity arises when the company does a rights issue, where new shares are issued, in which case the company may reprice the shares or not, it depends on how much money they want to raise and how many shares are issued, they can issue new shares at a discounted price and let the market absorb the price difference.

There is a reason why Citigroup have done this, and it’s likely as you say just to price the individual share up for whatever reason, be it listing or some other reason that may not even become apparent for months.

This won’t affect the index since the market capitalization of the company doesn’t change, the same will go for P/E, also remember that the share price is relative to how many shares there are, so it’ll be market capitalization again.

All the investors will have had their shares converted, so it’s not an issue for the broker, the broker would not be holding a position.

The issue would have been discussed and passed in a shareholders meeting, probably the AGM, and all shareholders notified in advance.

It’s like if you came to me and bought 100 sheets of A5 paper @ $1 each = $100, but you decide you want A4 paper so you stick 2 of each A5 together so now you have 25 sheets of A4 worth $4 each = $100.

See simple - you’ve been overthinking again, I told you before too much this thinking lark won’t do you any good.

8

Good morning.

Nope: in THIS case just LEARNING more is all!!! LOL!!!

But thanks for the input.

What I don’t understand in your answer is how this could NOT affect an index though??? Each index is based on the stock prices (of course relevant to the company’s weighting in the index)??? Alright: in THIS PARTICULAR case there should be no effect but this only because Citi is not part of any index at the moment (I’d better check that). But could this be done on ANY CURRENT Dow or S&P component???

Also: I don’t know about the brokers but the traders???

Simple example:

If I were to buy 100 shares (CFDs) of Citi TODAY it would ‘cost’ me in margin $412.30. LAST week (before Friday) the same 100 shares (CFDs) would have only ‘cost’ me $41.23 in margin (assuming no price changes OBVIOUSLY)!!! OK: the TICK VALUE would not have changed but the amount of margin required will HAVE HAD to have changed not so??? So what if a client (trader) had $300 of available margin last week and was long Citi??? All of a sudden the client (trader) is short (no pun intended) of enough margin to keep the position open (or, as I said, the postiion size would have to be reduced ten fold which, then, WOULD affect the TICK VALUE)???

Regards,

Dale.

9

They will be part of an index, i.e. they have to be somewhere, but it’s the market capitalization the will determine the index position not the share price.

10

Sorry but this is a ‘bump’ i.e. I edited (added to) my last post but you had already replied. See my additional note about traders and margin requirements.

Regards,

Dale.

11

They are not the same shares, they will have been converted, the total value will be the same, be it CFD’s or actual stocks the same will apply.

12

Sorry: THIS part (margin requirement) and therefore your answer doesn’t make sense to me.

I mean: I’m not ‘the sharpest tool in the shed’ but I DO know that TWO WEEKS AGO (by the way: my dates are ‘out’ in the original post i.e. it was not LAST week that this happened but the week BEFORE last) the margin requirement for the same number of CFDs was ten times less than it is today!!!

Come to think of it: this should be an interesting one for Customer Service!!! LOL!!! I’ll let you know how they INDEED did handle it!!!

For interest sake here’s a (my) daily chart i.e. clearly showing the sharp, initial, selloff (although it appears to have lasted the whole week last week).

CitiGroupDaily.jpg700×672 77.8 KB

As a matter of fact: I see a potential buy signal coming!!! LOL!!! ONE BIG DIFFERENCE NOW though: ZERO is a WHOLE LOT FURTHER AWAY than it was two weeks ago!!! LOL!!!

Regards,

Dale.

13

Corporate actions such as a reverse stock split wouldn’t really have any effect on a stockholder other than they will end up getting fractional shares returned to them as cash. So if they had 225 shares previously and have 22.5 after the stock split the 0.5 gets returned as cash and the shareholder will have 22 shares.

Those who were trading via CFDs or ETFs could be eligible for a margin adjustment as the open face value has changed. I’m not sure how it was handled in practice though. The actual value of the CFD will stay the same though as the broker will automatically change the quantity and price to reflect the stock split. If there’s a corporate action that they can’t really replicate the broker usually reserves the right to close and re-open your position to make it as close as possible.

The indices aren’t affected as they work off market cap and not the stock price which isn’t really indicative of stock value. Citi and JPM have roughly the same stock price but JPM’s market cap is 50% higher approx.

14

Hello,

And thanks for that information. But I stiill don’t understand.

Sorry: I’m not trying to turn this into a protracted discussion (as is usually the case with me) but I really do want to understand this (and I do realise that this not something that happens too often I’m sure).

And I’m not questioning your knowledge i.e. I’m just trying to understand (one or two of my comments that will follow may give the impression that I’m questioning your knowledge which is why I make this statement now).

(And by the way: I’ve sent Customer Service an email asking them HOW INDEED they handled the situation and I’ll post the response here obviously).

Those who were trading via CFDs or ETFs could be eligible for a margin adjustment as the open face value has changed. I’m not sure how it was handled in practice though. The actual value of the CFD will stay the same though as the broker will automatically change the quantity and price to reflect the stock split. If there’s a corporate action that they can’t really replicate the broker usually reserves the right to close and re-open your position to make it as close as possible.

Whichever way it was accomodated would have had the effect of reducing the tick value not so??? If TWO WEEKS ago you had 100 units (CFDs) your tick value would have been $1 per tick. If the margin requirement was adjusted (increased ten fold and the position size then decreased ten fold) then today you’d only be getting $0.10 per tick??? The only other way around this would have, in theory, been to increase the leverage ten fold so that the client could retain 100 units and therefore still have a tick value of $1 per tick???

The indices aren’t affected as they work off market cap and not the stock price which isn’t really indicative of stock value. Citi and JPM have roughly the same stock price but JPM’s market cap is 50% higher approx.

This doesn’t make sense to me. The Dow and the S&P 500 are ‘averages’ of the individual stock prices in the index are they not (the effect that a price change of an individual stock would have on the price of the index would be relative to its weighting in the index of course). What your statement intimates is that the market cap of a company changes every second of every day??? (That’s why I said: not questioning your knowledge and appreciate your input but it doesn’t make sense to me).

Regards,

Dale.

15

Sorry I was wrong originally - forgetting some of the stuff I did some time back. The indices aren’t the averages of the individual prices but actually the sum of the component prices divided by a divisor. This divisor changes whenever there is a stock split in one of the market participants in order that the index retains the correct value. They even go back and adjust all the historical data so that the trading volumes, etc. are adjusted to reflect the recent stock split.

I’m not 100% familiar with CFDs. As I understand it your contract size won’t change. If you had 100 units @ $5 your contract size would be $500. After the split you would have 10 units @ $50 for a contract size of $500. I would’ve thought that this should have left what you earn from the movements of the stock unchanged?

16

Hello,

Thanks. That makes more sense (the first part)!!! LOL!!!

And here we have it ‘straight from the horses (brokers) mouth’ (see: I KEEP TELLING you people that Deltastock’s Customer Service is the best)!!! LOL!!! (Sorry: I had to ‘stick that in’)!!! LOL!!!

[I][I][B]Before the split you had:[/B][/I][/I]

[I][I]100 shares x 4, 60 = 460 USD[/I][/I]
[I][I]460 X 10% = 46 USD (required margin)[/I][/I]

[I][I][B]After the split you will have:[/B][/I][/I]

[I][I]10 X 4, 60 = 460 USD[/I][/I]
[I][I]460USD x 10% = 46 USD (required margin)[/I][/I]

So I’m right. Your TICK VALUE would have changed from $1 per tick to $0.10 per tick (given that the position size has been reduced ten fold). What I DIDN’T ask though (and will RIGHT NOW): what would have happened to the profit (or loss) on the same open position??? Now THERE’S one for you!!! LOL!!!

Regards,

Dale.

17

Just like my example with the sheets of paper! LOL!!!

18

ALMOST!!! Excepting that your sheets of paper don’t ‘move’ (in ticks)!!! LOL!!!

Let me put it this way: had I been in a profitable long-term trend trade on Citi and was getting $1 or $10 per tick and all of a sudden the goal posts were moved I’d be HIGHLY ‘pis*ed off’ let me tell you!!!

Regards,

Dale.

19

Alright well I could live with this I guess (from my wonderful broker):

The P/L realized up to the time of the split should not change.

Regards,

Dale.

20

Just my thoughts on how it must work. I imagine your current position would have to be converted accordingly. ie. your 10 ticks long would become 100 ticks long but at 1 tenth of the value for every tick

Here’s an example:

If the value of one Citi stock increased tenfold then the number of stocks would diminish tenfold to maintain the same total value. Now for your open trade… say you were in a trade long and you were up 10 ticks(for easy calculations). If originally you were $1 per tick you’d be up $10 at this point. After the split took place every tick would now be $0,10 but for balance your open position would HAVE to be 100 ticks up instead of 10 which would still be a total of $10 up for you.

Just my thoughts… but that would be how it would HAVE to work. Otherwise, as you said… people would be HIGHLY p*issed off!