A stock split is taking one stock and creating two from it. This is like when a person needs change for a 20 dollar bill and the cashier gives them 2 ten dollar bills in exchange for the $20 bill. The mental premise behind this is like that of a small child at Christmas. They would rather have 20 $1 bills than just 1 $20. It appears to be more. By splitting a company's shares, the stock price falls, making the shares more affordable by more investors. Additionally, the company get more shares to spread around.
It is important to note that this process does not increase the value of the company. What it does is reduce the value of the stock while at the same time increase the number of outstanding shares that are on the market. The advantage for a company to undertake this process is to make it easier for investors to purchase stock.
The ability to move or liquidate the stock is another reason a stock split may occur. Each stock on the exchange has 2 prices. There is the bid and the asking prices. The larger the stock price, the larger the spread between these two is. By keeping the value of the stock relatively low, the company can better control the bid and asking price, and making it easier for the stock to be exchanged on the open market without losing any significant revenue because of the price difference between the two.
For investors, many believe it is best to purchase a stock before it splits. This is because the cost savings on the commissions for the purchase is now divided in two. This is only relevant if your broker charges per trade and not a flat fee for their services.
In all truth, a stock split has no additional value to the stock holders. It does make the stock easier to liquidate because of the lower price, but there is no added value in monetary terms.
For another great resource from this site please look at Money Tips.
Related posts:
- American Depository Receipt (ADR) Explained
- Investing in a Company Vs Investing in Art
- 7 Ways to Reform Healthcare That Empower Individuals
Yakezie Posts
- Elton John AIDS Foundation Credit Card By webfriendlywriters
- A Thousand Leagues Under the Sea…Homeowners Tread Water By Little House
- August 2010 Wrap-up By Kay Lynn
- What Are You Waiting For? By Jackie
- Finding True Love: What Should You Look For In A Bank? By Jesse Michelsen
subscribe to the 
follow The Debt Hawk on 
{ 2 trackbacks }
{ 0 comments… add one now }