If you’re a bowler, the last thing you want is a split. If you’re an investor, however, the picture is a little more complex. If you own a stock that’s going to split, or already has split, there are a few things you should know.
A stock split occurs when a company decides to increase the number of its outstanding shares while decreasing the value of those shares. So, for example, if you own one share of stock that sells for $20, and the stock splits two for one, you will now own two shares, each worth $10.
Why does a company choose to offer a stock split? The key reason is fairly obvious: to attract new investors. A high-priced stock may be beyond the reach of many people, but if the share price drops by a half—or two-thirds in a three-for-one split—more investors are suddenly in the ballgame. Thus, stock splits are a useful sales tool for companies.
While the companies involved may well benefit from stock splits, the advantage to you, as an investor, is far less clear. On the most basic level, you now have twice as many shares (or three of four times as many, depending on the split), but you’re not one penny richer, because the total value of your shares hasn’t changed. Therefore, if you’re going to benefit from a stock split, your stock’s per-share price must rise from its new, post-split level.
Will that happen? Nobody knows. Some evidence suggests that stock prices do tend to rise right after a split, but there does not seem to be a positive effect on the long-term stock price. Consequently, it’s hard to make a case that a stock split is unequivocally a good thing for investors.
Nonetheless, if you’re interested in knowing whether a particular stock will split, you might want to watch for some important signs, such as a very high stock price or a previous history of splits.
Once the stock-split process begins, several key dates must be kept in mind. The announcement date is the day the company announces it will split its stock. The record date is the date companies use to determine who is entitled to the split shares. And the ex-dividend date is the most important date for receiving the split share. You need to buy the stock before the ex-dividend date to get the shares.
You may someday find it useful to know the logistics of stock splits. But you’ll be doing yourself a favor if you don’t attach greater importance to a split than it warrants. In the long run, whether a stock splits is of far less importance than the characteristics of the company issuing the stock. If it’s a good, high-quality company that has achieved consistent sales growth and a long record of earnings, then it may be of interest to you — split or no split.
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