4/9/06
Stock Splits - Wow, I'm in the money, now!
I've heard more than a few people get excited about a stock split, and others depressed about a reverse stock split.
If this is already confusing you, stay with me and I'll clear it right up
Some companies, more in the past than now, used to try to keep the price of a share of stock within certain minimum
or maximum. They felt that a very low or high price would discourage investers and that can be true to a certain
extent. If a stock falls below one dollar for a period of time it will fail to meet listing requirements for NASDAQ.
If that sentence confused you, skip it, it's not vital to the main point of the newsletter this week, but I thought
it ought to be said.
When a stock gets above a certain price, let's use $80 as an example, a company can decide to "split" the stock and
issue two stocks worth $40 for each single stock that was worth $80. The thought is that $40 sounds more affordable
to the general public. Someone looking to buy 100 shares would be able to afford $4,000 more easily than $8,000.
That split is a classic 2 for 1 split. The same company could decide to do a 3-1, 4-1 or any other split they would
choose. All this is regulated by law, but perfectly acceptable.
The reverse-split is just want it seems to be; a company has a lower priced stock, say $5 and they want to appear
larger, they can combine shares to make it $10 (1 for 2) or $15 (1 for 3) or any other combination.
The bottom line is, the splits either way do not affect how your money is invested. It still will have the return on the
dollar amount invested. Per share price doesn't impact your return. I can hear the muttering from the back of the
room about dividends per share, but I'll address that now. If you had four shares and they split, the dividend will a
lso reflect that split. Four shares that earned $4 dollars will turn into 8 shares that earn $.50 each - still $4. Any
way you split or reverse split, the numbers will add up the same.
That will lead right into another point I wanted to make while we are on the subject. You don't have to buy an 'even'
number of shares. Once upon a time, in a land far, far away, when we dealt in paper, people shouting buy, buy, buy,
sell, sell, sell, and the phones were rotary dial, blocks of shares were the norm, and mostly were required. In today's
world, you can buy one share or 263. Whatever floats your boat. Now, transaction
fees might make you want to be cautious about smaller lots, but the bottom line is the dollar amount you are paying.
One share of Barkshire Hathaway (A) goes for $89,200 (as of 4/7/06). Most people aren't looking to buy thousands
of those. As a matter of fact they are so expensive, Warren decided to have a "B" stock, and even that is pretty
pricey at $2,972 (also from last Friday) Many companies would have decided to make a split long ago, but for
whatever reason, Berkshire Hathaway doesn't split.
Getting down to the nuts and bolts of the subject. Splits either way are window dressing. Merely esthetics to
message those who like an "affordable" per share price. If you are still confused, let me know.
As always, all questions are welcome and will be answered in the order they are received. Quick turn around time,
customer always comes first here!
Good solid investing to all,
Rob
The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy
copyright Robert E. Britt 2006