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.
Rate this article : Low | High |
- Stock Investing vs. Saving
- Investment Goals Planning
- Mutual Funds vs Individual Stocks
- Classes of Assets - Asset Class Definition
- Stock Investing Basics
- Setting Stock Prices
- Stock Buyback Reasons
- Stock Basics
- Stock Dividends Basics
- Stock Market Cycles
- Federal Reserve Board (Fed) Functions and Importance
- Stock Market Sectors Classification
- Stock Market Indexes and Fair Value Indications
- Stock Market Movements
- Stock Share Types
- Bid and Ask Prices
- Stock Trading Basics and Order Types
- Market Makers Role and Responsibilities
- NYSE and Market Specialists
- Company Market Capitalization
- Stock Price Influences
- Stock Order Types
- Newspaper and Online Stock Quotes
- Stop Loss Order Fundamentals
- Trailing Stop Order Basics
- Advance Decline Ratio Basics
- Foreign Stocks Basics
- Asset Allocation Basics
- IPO Basics and Strategies
- Earnings Season Basics
- Option Basics and Types
- Consumer Price Index Basics
- CPI Basics
- Rising Interest Rates and their Effects
- Stock Market Investing Basics
- Why Do Companies Go Public
- Introduction to Stocks
- Stock Price Volatility
- Fundamental Analysis Technique Basics
- Technical Analysis Basics
- Importance of Current Assets and Current Liabilities
- Price/Book Value Advantages and Disadvantages
- Understanding Return on Equity and Return on Assets
- Understanding Inventory Turnover Ratio
- Price to Earnings Growth Ratio (PEG) Explanation
- Price to Earnings (P/E) Ratio Basics
- How to Read Stock Tables
- Understanding Trade Execution
- Auditing Essentials
- Understanding Mutual Companies
- What Are Financial Analysts?
- What Investors Need to Know about Financial Analysts
- Investment Planning 101 – Getting Started on Investing
- Hedge Funds 101: Introduction to Hedge Fund Investing
- Variable Annuity Contracts Explained
- Closing Price Discrepancies
- Convertible Securities Definition and Types
- Ex-Dividend Date and Record Date Explained
- What Is Day Trading?