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The common mistake made by those who do not understand splits is the notion that the stocks hold the same value after the split. This is not the case. The actual value of the stock is split in two. In other words it is now only worth half of what it used to be. This is very important to understand. As a consequence the value of the stock is the same as it was before the split.
The question then is. Why do companies do this? Mainly it has to do with the psychology of the investor. When a stock is very expensive say $80 a share a lot of potential investors would not buy it because it is so expensive. When the stock is split now it is worth $40. As a result it is more attractive to buy because it is affordable.
Not all stock splits are split in half. There are a number of ratios to determine a split. Some of the ratios include 2- for-1, 3-for-2 and some even go to 3 to 1. Stock splits do not just go one way either. There is also what is known as a reverse split. In this case the amount of stock is reduced. This type of split is less common. The goal of the company here maybe to increase the value of the stock so that they can stave of de-listment.
Whatever the case just like anything else, understand the fundamentals of what you are getting involved in. Be informed and make some money.
Category: InvestingStock Splits - Going Beyond The Myth was written by:Author:Benjamin WiseAdded: Wed, 13 Jun 2007 01:36:26 -0400 This Article Has Been Read 260 times View all Benjamin Wise's articlesAbout the Author: Learn how to Enlarge Your Breasts Naturally using the number 1 rated enhancement program on the internet http://www.lfdab.com/Breast-Augmentation.php |
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