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Am I Missing Something?



July 25, 2008 – Comments (4)

Granted, I'm still a relative beginner at this stuff, so maybe there's something important here that I'm missing, so I'm passing this along to the other CAPPERS (if that's a word) out there:

Why is it that some people get so excited about a stock split?

If someone gives me a $100 bill, and I change it for 10 $10 bills, I don't get all excited, screaming, "my dollars just did a 10-1 split!"  It's still the same $100.

So why do people treat a stock split any differently?

Thanks in advance for the replies, and have a great weekend!

Which reminds me, I probably won't be around the computer for the weekend, so feel free to reply to this, but please, no one write any interesting blogs while I'm gone as I might miss them.  Save all your good stuff for Monday.

4 Comments – Post Your Own

#1) On July 25, 2008 at 4:59 PM, DemonDoug (30.95) wrote:

Because stock splits usually signify that management is bullish on the company.  Stock splits are useful to keep retail investors involved, and also for stock option awards for employees.  You don't split the stock if you think it will just stagnate or go down.  Lower share prices tend to get more retail investors - you don't see joe blow buying 100 shares of BRK-A or even BRK-B cuz that's like millions of dollars (institutional investors and super rich only).

Stock splits are good, IMO.

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#2) On July 25, 2008 at 5:15 PM, Tastylunch (28.76) wrote:

I agree with Demon Doug. What it does is it opens the door to more buyers of stock by lowering the cost barrier, thus in theory creating more demand for the stock.

The only thing I would add is that excessive stock splitting can get a company into trouble though if they aren't careful as many mutual funds etc have rules preventing them from owning shares of companies that trade below x dollars (usually ten) per share.I read a study somewhere that anything that any split that is more than 2 for 1 usually produces subpar results.

E.g. sun Microsystems (JAVA), they recently had to have  a reverse stock split to try to address low share price from excessive splitting during the internet bubble (reverse stock splits are typically very bad for short term performace as it's taken as admitted weakness by management)

So in short stock splits within reason are usually good, reverse stock splits are almost always bad.

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#3) On July 25, 2008 at 5:43 PM, QualityPicks (26.56) wrote:

That is a good explanation by DeamonDoug as to why a stock split MAY be considered good. I would only like to add that you have to dig a little deeper on the specific stock and company to try to find out if those are valid reasons that apply to your specific stock.

Companies know that they can cause "hype" by splitting their stock, so they usethe split as a way to try to hype/pump their stock. So in a way, you should pay more attention to see if the company is really growing, and is in a strong position. If it is not, then the split may be meaningless.

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#4) On July 25, 2008 at 6:03 PM, PhillyDan (77.08) wrote:

High Tech startups back in the late 90's, think BRCM, AMCC, etc. were notorious for doing stock splits for the reasons that DemonDoug mentioned above.  This trend has slowed down with Google taking a position of no stock-splitting.  

Typically if a company that has a high PE ration with significant growth rate increases in revenues and earnings, they will split stock as opposed to giving a dividend and to reward investors and employees (via stock options).  The one thing to watch out for is the number of shares outstanding, if a stock get too diluted (too many shares outstanding), analysts tend to react negatively to too much dilution and might downgrade the stock.

I was involved in a real life example.  I worked for a company that was going public in 2004 but we had 135 million shares outstanding.  Morgan Stanley who was the lead brokerage firm recommended that we do a reverse split of 6 to 1 before we went public which our company did to make it more attractive for our IPO. 

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