Stocks splitting?

Question

What is the purpose of a company splitting it's stocks and what are some tell tail signs that a stock may be splitting soon?

Answer 1

The purpose to stock splitting is to do a couple of things.

First it keeps the price lower so that more smaller investors can afford to purchase the stock.

Second it dilutes the shares so that control of the company is spread out making it harder for other companies or larger shareholders to own too much of the vote.

Thirdly it helps the larger shareholders (see management) to double down on the stock because there is usually a slight increase in price after a split (fund managers and individual investors keep buying) and this also has a positive effect on a companies capital.

To spot a company that has a good chance of a stock split, look for companies that have strong stable earnings, a large sustained increase in price over the last year or two and are a leader in their industry.

Answer 2

Some individuals have an upper limit on how much they will pay for a share of stock, and many institutions are not allowed to purchase stocks that are less than some specified price. Therefore most companies will aim to keep their stock price in a range of $20 to $60, or maybe $100 at the upper range.

The only way to anticipate a split is if the company has a history of splitting around a certain price. For example, if Intel ever gets back to $80 or more, it's likely they will split. Split announcements frequently cause a knee-jerk pop in the price, but over a long period they have no effect on the price so there is no point in chasing them.

Answer 3

I think that the main reason that stocks split is to keep the price in a range that potential investors can afford. By keeping a share of stock under $100 more people have enough to invest. Take Microsoft for example, the have split 8 or 9 times in the last 15 years. Sometimes it is 3 for 1, but usually 2 for 1. Not every company is like that though. Take Berkshire Hathaway (Brk.a) for example, they have never split their stock, and it is worth close to $110,000 per share. Not many people can afford to invest in something that expensive.

Hope this helps!

Answer 4

A stock split can be any ratio the directories choose, but it is usually 2:1 or 3:2. The stock is split to make it more affordable. The total amount of equity you own in the company is unchanged by a stock split. For example, if you own 100 shares of a $50.00 stock, that is a total value of $5000.00. If the stock splits 2:1 then you will have 200 shares of a $25.00 stock and that is still a value of $5000.00. The company has no change in capital after the split but is in a position to raise capital more easily when it issues more stock to the public at the lower price. You still have the total $5000.00 invested. A dividend is a way for a company to distribute retained earning and reduce taxes. For the stock holder, their total equity also does not change when a dividend is paid. The value of the stock is reduced by the amount of the dividend received. Also, if the stock has options traded on it, the value of the call goes down and put goes up by an amount equal to the delta of the option times the amount of the dividend. However, unlike a stock split, the total amount you have invested in the company changed by the amount of the dividend when the dividend is paid. A cash dividend is a special case of a distribution. The dividend can be paid in the form of stock distribution. In this case, if there is a 5% dividend and you own 100 shares, then you get 5 additional shares. In this way it is the same as a 105:100 stock split. This is a way for the company to "force" a reinvestment of the dividend into the company and changing its tax status from income to stock holder's equity. What if you only have 2 shares of the stock? They cannot give a factional share, so they give a cash amount equal to 5% of the stock value on the ex-dividend date. In summary, there is no change in stock holder equity in stock splits but there is with dividends. Said another way, stock splits cause no outflow of capital from the company whereas a dividend does.

Answer 5

Stocks split so that they are priced at a price investors like. For example if a stock is selling at $500 per share then many small investors can't buy 100 shares (thats 50K) and investors prefer this.

Still, its mostly just psychological as splitting a stock from $50 to $25 probably won't any difference long term.

Only way to tell who is splitting is to wait for the company to make an announcement.

Answer 6

Stock splitting is a mostly a psychological happening.

You have a $100 stock (100 shares = $10,000)
Split that stock 2 to 1
You have a $50 stock (200 shares = $10,000)

If you want $500 worth of stock, you can buy the number of shares that closely matches how much you want to invest. The only thing that matters is... what percent it goes up.. or what percent it goes down.

Splitting made sense 30 years ago when partial lots were more costly to trade. That's insignificant now.

Forget splits. No one that trades regularly pays any attention to them. It's only the newbies that think it's important. Anyone that tells you differently is not a serious investor.

Answer 7

Well.. main advantage is making the stock more liquid. For example, Berkshire Hathaway, which has never split, at over $3500 a share is hard to sell without completly liquidating all your shares. Also very hard to buy without a large initial inivestment.

It's really hard to tell if stocks are going to split or not. It really depends on what the board of director decides. If it's in the best interest of everyone to make the stock more liquid they may decide to split it.

Other factors that might go into split decisions are if there is an upcoming public offering of more shares. They may decide to split the shares prior to the offering to avoid over dilluting the existing shares.

Answer 8

It just means that they make the price of stock affordable to more people.

As for signs, there really aren't any, some companies decide to split others don't