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Answer:
Dear
Pierre,
A
good question...one that every investor should know
the answer to as stock splits are not uncommon.
A
key point to keep in mind is that a stock split will
not change your stake in the company. It may
(or it may not) boost the stock's price.
WHAT
IS A SPLIT?
A
stock split is like receiving two $10 bills for a
$20. It's really that simple. The company simply increases
its number of outstanding shares. There is no change
in your equity. In other words, you now have two pieces
of paper but your $20 is still only worth $20.
Splits
come in many shapes and sizes. They can be 2-for-1,
3-for-1, even a reverse split, such as 1:4.
THE
IMPACT OF A SPLIT
Keep
these 5 points in mind, when you hear about an impending
stock split:
1)
INCREASED INVESTOR INTEREST
While
the value of the money in your pocket has not changed,
stock splits are a positive in that they stimulate
investor interest. This, of course, is one of the
reasons why management declares a split -- to increase
the visibility of its shares in hopes that more people
will buy the stock. With increased volume, on the
buy side, the share price is likely to rise, although
there's no guarantee that it will.
2)
A HIGHER DIVIDEND
A
split may also mean that the company will increase
its cash dividend. A New York Stock Exchange found
that about 58% of the companies surveyed said they
increased their cash dividends at or around the time
of their stock split. But as in all things stock related,
you should not count on an increase.
3)
A LOWER PRICE
Splits
almost always bring a stock down into a more popular
trading range because the split decreases the price
per share. Management realizes that an extremely high
price does not go over well with many small individual
investors and that psychologically, these investors
(and others, of course) are apt to shy away from buying
100 shares of an $80 stock but are less hesitant to
buy 200 shares at $40/share.
4)
BUY BEFORE OR AFTER A SPLIT?
This
is a very common question and over the years there
have been a number of studies on the topic with the
results supporting both sides of the issue. These
two survey findings, however, appear to be sound:
-
In 97% of the cases studied, the stock increased
on average 5.2% the day the split was announced.
-
For six months after the split, 75% of the stocks
split outperformed the Dow. But in all fairness,
this study did not address the issue of whether
the stock split caused the rise in price or something
else did, such as increased earnings.
So,
it appears that the best time to own a splitting stock
is prior to or immediately after the announcement.
5)
INCREASED FUTURE EARNINGS
One
conclusion we can draw fairly conclusively is that
when management decides to split its stock it's because
the stock has moved up in price over time and the
company feels pretty confident that future earnings
growth will continue.
WHAT
TO DO
If
a stock you own declares a split and your shares are
held here at BUYandHOLD, the additional shares will
show up on your account statement.
FOR
MORE INFORMATION
You
might want to log on to: www.stocksplits.net.
On this quite commercial site you can sign up for
a newsletter that will alert you regarding splits.
The factual information about splits is accurate but
there is a bit of a spin in the accompanying promotional
material, especially the material that maintains splits
are a way to make money. So proceed with caution.
Good
luck!
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or profitability of any particular security, portfolio
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