Stock Split Basics

There are times when a company may decide to split its stocks. This represents good news for many investors. However, many financial experts argue that stock splits benefit in no way stockholders.

Reasons for Stock Splits

One of the reasons why a company may execute a stock split is to decrease its price per share. This is done when the price reaches too high levels, which may discourage potential investors. As a result of the executed split of stocks, the price is put at a reasonable level, thus increasing the chances for attracting even smaller investors.

Another reason is for the company to split its stocks is to increase the latter's liquidity. Decreasing the price of shares leads to higher volumes of the latter being traded.

2-for-1 Stock Split

This is the most common stock split. In order to understand it, consider the following example:

Company XYZ has decided to make a 2-for-1 stock split. John holds 100 shares before the split and each share costs $50. So, John possesses $5,000 worth of stocks. Therefore, after the split John will own 200 shares, which are again worth $5,000. The new price of the stocks on the market will be decreased to $25 per share.

There are also such splits as 3-for-1 or 3-for-2. From a theoretical point of view nothing changes within the company or with the value of your holdings.

1-for-2 Reverse Stock Split

In reverse stock split the opposite movement is observed. Namely, the company reduces the number of shares and as a result the price per share is increased. Consider the following example:

Company XYZ has now decided to execute 1-for-2 reverse stock split. This means that now John will own only one share for every two shares he possesses. So, John will own 50 shares (instead of 100) and the price per share will double to $100 (instead of $50).

The reasons to execute a reverse stock split include the increase in the price of the shares. This is sometimes required in order to keep the required by the stock exchange level. No matter what the reasons are, a reverse stock split should be interpreted as an indicator that something is wrong with the company since it is not able to keep its price level to the required limits.

Stock Split Calendar

The stock split is not an enough indicator that the company is worth of investing in. Further research should be done to see whether it is really reasonable to put your money there. Still, if stock splits are what you are looking for, there are many sources (such as yahoo stock split calendar) that will provide you with information on future stock splits, which may be a good starting point for your research.

Final Piece of Advice

It is recommendable to buy stocks before the split is executed in case you pay the stockbroker according to the number of shares you purchase. Additionally, a stock split should not be a criterion on which to base your decision whether you should purchase a stock or not. You should be guided only by your financial goals and how the particular stock meets them.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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