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Many Investors Do Not Understand Stock Splits - Is There An Opportunity In Netflix?

The stock price is not the stock's price.

Many investors have not learned this fact.

Netflix shareholders will vote on a stock split on June 9, 2015.

There may be a hidden opportunity for investors who understand.

Every time a popular stock clears the $200 mark, you start to hear investors complaining that the stock is too expensive and calling for a stock split. The investors who are complaining are almost always on the sidelines. In other words, they have no position, believe the stock is too expensive to initiate a position, and are calling for the company to split the stock so they can buy it cheaper.

Case in point: I recently saw a post on StockTwits stating that Netflix (NASDAQ:NFLX) "needs a stock split soooo much." This post came on a day when Netflix was up 4.5% on news that they may be expanding into China and following a quarterly report that sent shares soaring more than 20%. The StockTwits post was a reminder that many investors do not completely understand stock splits and this fact could be a hidden opportunity for those who do.

Many investors do not know the correct answer to this question

Using Netflix as our example, let's presume that the stock is trading at $600 per share when management decides to split the stock 10 for 1, causing the stock price to drop to $60.

Presuming the above split, is Netflix stock at $60 now cheaper than it was at $600?

Mechanics of a stock split

Before we get to the answer, we must understand that when a company does a stock split, the shares outstanding go up proportionate to the share price going down. In the Netflix example, a 10 for 1 stock split would look like this:

How much are we paying for earnings?

Now that we understand the mechanics of a stock split, let's look at the most common...