Let us say that for years one has been holding a stock that steadily increases in market value. Then, the person receives a letter from the company in which he owns some stock. The firm announces to its shareholders that there will be a stock split. As a shareholder what will this mean to the person?
There will be no reason to panic or celebrate. If one owns a hundred shares of stock X at $50 per share, the market value of the stock he owns will be $50. Let us say that a two-for-one split is announced by the company. The result will be that one will own twice as many shares which are priced at $25 per share. The total value of the shares will still be at $5000. The person did not lose or made a dollar and his holdings value stays the same.
The decision for a split may result for a number of reasons. It is often the case that the price of stock has risen significantly over quite some time, usually years. The stock attractiveness, as a result, may have begun to decline. The price has skyrocketed, although the value of the stock is also higher.
On the other hand, a reverse stock split may be initiated by the company when the latter decides that it is trading its stock at a low value. The perception of the investors may be that their stock has become too cheap. Therefore, trade at a low dollar value may come for a reason. In some cases, when the stock is below $3 in value per share, investment firms and investors find it unattractive. To answer such perceptions, the companies may decide to execute a reverse stock split. Let us say that stock X trades on a stock exchange at $2.5 per share and one holds 100 shares with a total value of $250. Then, the company decides to make a two-to-one reverse stock split. One will end up owning only 50 shares of stock X that are priced at $5 per share.
Free charting webinar
Mon, Nov 18th, 2013 12:00 PM - 1:00 PM EST
During the 60 minute session Paul Coghlan, founder of Coghlan Capital, looks at current charts for currencies, precious metals, US indices, highlighting turns and low risk entry points using the Median line analysis methodology.
Median line analysis reduces risk and increases the chartists ability to see trend direction, trend strength and highlight entry and exit levels.
Seats are limited so be sure to reserve your spot today. The webinar will be recorded, by signing up you'll receive an email with the webinar replay afterwards.