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Stock Splits And How You Can Profit From Them |
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Submitted by Consuelo Acosta
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Stock splitting is something that investors like. When stocks split, it means you have twice the amount of shares you did before. The value of each one does go down but the amount increases. This gives you greater leverage and the stocks have a chance of going up in value in the future.
Companies sometimes like to split their stocks down the middle. If you have 100 stocks worth $2 each and the company splits its stocks, you will then have 200 stocks worth $1 each. The total value is the same but you feel like you have more stocks. It is like changing money – you have two notes instead of one although your pair of $10 notes are the same in value as the $20 you had a moment ago.
Smaller investors can get into the market more easily because of stock splitting. Someone is more likely to buy cheaper stock if they do not have a lot of money to invest. If a company is selling stock for $300, an investor might think that is above their budget, but if the stock is split and ends up at $150, the investor might consider that a reasonable price. Splitting stocks is a game where the value does not go up or down but people prefer stocks which seem to be cheaper and think they are getting a better deal.
There are various ways that a company might decide to split their stocks. Nearly all companies will stick to the two stocks for one rule, but some might offer three for one. Another company might reverse split their stock, meaning you had ten stocks worth $200 before. Now you have only five stocks but they are worth $400 each. If a company feels that its stock price is too low, it will consider doing a reverse split. It might want to make sure the company does not get de-listed or another reason for a reverse stock split is when you want fewer stockholders, perhaps wanting to make your company private.
If a company has lower stock prices, they have more liquidity. More people find the stocks affordable and there is therefore more interest in them.
Sometimes, however, stock splitting might provide false hope for investors because an investor will expect certain returns on his investment when the stock price changes. If the company does not deliver what people expect, they might lose the market’s confidence which means falling stock prices.
Stock splitting is not always good or always bad. It depends on the company and the reasons for the split. The company will split its stocks to alter the perception of its investors. If this works out the way they want it to, the stocks might raise. If not, there will be no change.
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