In this article I’ll discuss the potential implications for the Index and then share my strategy for dealing with it.
What is a share split?
Those who don’t know will first want to check out the official Football Index news post that has some of the details. Essentially, 100 shares in a £10 player split by a factor of 4 would become 400 shares in a £2.50 player. The dividends reduce by the same rate. So proportionately, market cap and payouts remain the same. So… what’s the point?
Why would a share split be used?
Traditionally, a company would share split for two reasons. The first is pure psychology, and the second, a bit more substantial, is liquidity.
Psychologically, a share split just makes players look cheaper. For the marketing people, trying to peddle a £20 Neymar share in return for a potential 12p big match day dividend isn’t easy.
If you split that by x4 to bring him down to £5, with his big match day payout 3p that somehow (to me at least) sounds better.
As experienced traders we know it makes absolutely no difference to real value, but potential new traders looking into the platform may no longer get immediately turned off by the huge price tags.
Next, liquidity. When you make a share cheaper, you bring it into the budget range of more people.
You can reasonably expect more small portfolio holders to pick up the odd premium share or two. Therefore, there are more shares being traded amongst more people. Classic trading theory will tell you that this makes the market better at finding the true value of an asset (because more people are making more assessments of value) and higher trading volume can lead to more stable prices, without so many huge fluctuations.
The shares being held by a wider number of people should increase stability. For example, if the total supply of Salah shares is 1000, and 10 people own 100, the action of one of those holders has a huge effect on the market. If he/she makes a decision, it’s a big deal. If however 100 people own 10 of the 1000 Salah shares each, one person’s decision to sell becomes a drop in the ocean.
However, this will be blunted somewhat by the fact that those who currently cannot afford 100 £16 Neymar’s are not in any position to move the market. The majority of Neymar’s are held by a relatively small number of big fish, and this won’t change anytime soon. But over time, as more traders come in, the balance will shift away from “whales” and the decisions of individual traders will have less of an impact. That’s a good thing.
How does this affect the market?
The true value of players is not changing, and it’s crucial to understand that. A share split is a psychological marketing trick with a few fringe platform growth benefits.
It does not suddenly make an over-valued player under-valued. In the end, the market will decide what a player is worth based on their ability and potential to return dividends. Nothing else. That is the fundamental job of a market. But we do not trade in a “pure” world. We trade in a world full of inexperienced traders who do crazy things every day. There will be a dozen theories on how to profit from the share split. I suspect the leading one will be: buy the £7-20 range because they are the ones who will benefit the most from the psychologically reduced pricing.
That makes logical sense and I am sure many people will do that. The issue with that now is that many people have already done that and that is one of the reasons why those prices are that high. There is a risk here that people have bought early when the share split was first announced, and are now planning to flip those players amongst all of the hype.
We will definitely see some splashing about as traders try to work out what the share split will mean, and going with the most obvious theory isn’t a bad idea in these situations.
But when the share split settles down, it’s the quality of the player and their underlying real value that will determine price, and that is what I focus on.
My primary strategy at the moment is to accumulate the best value performance players at the best value prices.
It is true that the most expensive players should benefit most over time from the split.
However, in every circumstance thus far, higher prices at the top end of the market have filtered through to the cheaper end. If Neymar looks cheap at £5, then a fashionable performance player like Thorgan Hazard or Kai Havertz also looks cheaper at closer to £1-2. Therefore, I see no need to chase heavily into premium players now. Rather, I can just wait and let any share split bonus filter through to my existing positions.
We have already seen huge buying up of the premium players ahead of the share split. Therefore, chasing into them now for share split reasons does not seem like a sound strategy to me. If you wanted to do that, you should have done it already.
In the short term, a share split offers both chances to profit and traps for the unwary to fall into. For example, if there is now an expectation that a premium players price will rise when a share split is announced in the new year, why not buy now then dump before the share split?
There are a ton of ways this benign event could get the unwary into trouble.
Overall, I think this is a positive development that should help the market operate in a more stable way in future, by drawing in more traders and putting shares in the hands of a wider number of people.
But it is absolutely not the Holy Grail that many make it out to be. It fundamentally does not change real values. Overreacting to it would be a mistake in my view.
You can slice the cake as many times as you want, but it’s always going to be the same size. It’s the quality of that cake that determines how much it is worth, and that’s what we need to focus on.