Stock Splits

A stock split occurs when a company increases the number of its stock shares without increasing the total value of equity. This means that you will own a larger number of shares but the total value of investment remains the same. For instance, let's say you have 100 shares of a stock trading at $100. Then your total investment value is $10000. If the stock splits 2 for 1, you will own 200 shares of stock trading at $50. Still, your total invest is worth $10000. What's the catch here? Mathematically, stock split does not affect the value of stock and is completely irrelevant to investors. However, stock splits tends to occur when a company has done well and expect to continue in the future. From the company perspective, a point of stock split is to make its shares available to more investors. If you are investing on a budget, you might hesitate to invest in stock trading at $100 but $50 may sound affordable. Through the stock split, a company can gather more capital and make its stock shares more active in market. Stock splits were very common in the 1990s during the bull market. IMB split twice while Oracle split five times. Microsoft split seven times and Cisco split eight times. One thing that you must note in stock split is the lowered price of stock. Initially, stock split itself does not have impact on the value of stock but it will affect the price movement. Generally, lowered priced stock tends to move quicker than the higher priced ones. In addition, fluctuation or dollar movements of lowered priced stock has a greater % impact on return. For instance $5 increase is a 10 % gain for a $50 stock whereas it is only a 5 % gain for a $100 stock.