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Stock Split Information

In keeping with the purpose of splitting the stock, whenever a business declares a stock split, its share price will decrease. However, say an existing shareholder already owned 100 shares of the company valued at $100 each and a stock split of two-for-one was announced. The shareholder's total market value for stocks held would remain the same: $10,000. The number of shares held by the shareholder would increase to 200, but they would be valued at $50 each.

In this way current stock owners wind up owning more shares of stock without paying any more for it. On the other hand, the valuation of each share has decreased 50%. Depending on the company issuing the stock, splitting their shares can lead to quite a surge in the number of investors wanting to buy in.

In an effort to make their shares more affordable to smalltime investors, companies may split shares of their stock. Because this isn't a brand-new issuance of stock, it doesn't dilute the ownership interests of existing shareholders.

The splitting of stocks is not limited to only a two-for-one formula. Stocks may be split three-for-two or any other combination, although two-for-one is most common. Some mid- to long-term investors believe a stock split is ultimately advantageous to their earnings. A famous stock split decades ago concerned Dr Pepper stock. More recently, one can look at the example of AOL, which went public in March 1992 with an opening share price of ten cents. In the next 14 years, it split seven times. If a shareholder had purchased one share in March 1992 and held onto it until January 2006, that one share would have been worth, including dividends, $172.27.

Stock splits can be advantageous in a number of ways. Greater liquidity from lower prices per share means more activity showing on the board. It's obviously easier to sell stocks at lower prices when there's not as much of a spread between buying and selling price. A higher-priced stock that is suddenly "on sale" at half-price will interest a great many smaller investors who have been intimidated by the previous asking price.

Never underrate the effect of psychology when it has to do with investing. A stock split tends to be seen as a bullish-market indicator, showing that the issuing company is doing well financially. That was the perception with the famous Dr Pepper split and it carried over to the grocery market, where suddenly grocers couldn't keep the beverage in stock.

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Definition of the Day Law of One Price

Law of One Price - The law of one price relates to the theory that any commodity, asset or security will have the same price in more than one exchange. Should the price differ in anyway, then by what are called arbitrage opportunities an equality will be achieved. Essentially the...

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