What is the advantage (if any) to stocks splitting. Your source?

Question

Please be clear and exact. No personnal opinions please.

Answer 1

Stock Splits

When a company declares a stock split, the price of the stock will decrease, but the number of shares will increase proportionately. For example, if you own 100 shares of a company that trades at $100 a share and it declares a two for one stock split, you will own a total of 200 shares at $50 a share after the split. A stock split has no effect on the value of what shareholders own. If the company pays a dividend, your dividends paid per share will also fall proportionately.

Companies often split their stock when they believe the price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. By reducing the price of the stock, companies try to make their stock more affordable to these investors.

Although many stock splits are two for one, companies can split their stock in any number of ways, including three for one, three for two, and so forth. A stock that has split in the last 52 weeks will be identified in newspaper stock columns with an "S" next to the company's name.

Answer 2

A stock split just is a way to devalue the shares in the market place and place more in the float. For example if you have 1 share valued at $50 and you have a 2for 1 split you now have 2 shares worth $25 each. This makes the stock more palatable for new purchasers of the stock. Conversely you can also have a reverse split and that same share would now be a half @ $ 50 or every single share would now be worth $100. This takes less shares of the market.

Answer 3

There's a perceived advantage to the small investor, who thinks they don't have enough money to buy a solid Dow or S&P stock that costs $50/sh or more. But they have twice as much paper of the $25 at half the cost, so the advantage is only "perceived." The play on human psychology is "half the cost," a bargain, right?

There is no real advantage to the company, except free advertising of a non-event.

The only advantage is increased exposure, and thus a spurt of increased trading volume. But a day or two later, and we're right back to trading as usual.

So in the long run, there really is no advantage to a stock split.

Answer 4

To be clear as to what a stock split is -
Before split 100 shares at $50 each
After Split 200 shares at $25 each


The advantage is, the market price is now $25 a price that will allow more purchases, greater demand and will drive the price up, possibly back to $50 a share. Then you will have doubled your portfolio.

Congratulations!

Answer 5

In theory, there should be no real effect. Instead of having one share worth $100, you have two shares worth $50 each.

In practice, there are some slight advantages to stock splits after a run-up in price. The main one is that it increases the liquidity of the stock. One reason is because the bid-ask spread doesn't get cut in half, so trading profits increase for the market-maker. A second reason is that it makes the stock more affordable. Stock is usually sold in 100 share lots. Someone may be able to buy a full lot for $3,000 to $4,000 -- but not able to buy 100 shares if the price is in the $70-80 range.

Answer 6

My source is my experience being a retired stock broker. I can tell you that monetarily, there is exactly NO difference in the equity for a stock splitting. HOWEVER, a stock that has split is viewed psychologically as being a good investment... afterall, it's doing so well that the Board has agreed to split its share price... why would they do that unless they thought it would continue to go higher. So, the advantage to buying stocks that have split is purely a psychological one. Beware of REVERSE stock splits... that's when you get your share number reduced for a higher stock price... this is typically an effort by the Board to make a share price worth more than it really is... and it's typically bad news for investors who are unwary.

Answer 7

There is nothing to be clear or exact on - basic. Companies split shares to keep the share price in a range where individual investors like to buy. Warren Buffet does not believe in them so Berkshire Hathaway shares are at $100,000 a share. Of no importance whatsoever.

Answer 8

When a stock splits, you end up with two shares of stock equal in value to the one share you originally had. The price drops, making the stock more attractive to investors who buy more, forcing the price back up.

Basically, you end up with two shares of stock for every one you had and the price is temporarily low. It'll go back up again. A company splits a stock to make more stock available. Current stockholders get doubled when they do it.