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Stock Splits - Stock Markets

10 April 2006 - Markets - Editor

You don't have to be Donald Trump to understand that stock splits are deceiving and don't necessarily offer the great investment options they seem to present.

Case in point: Let's say you own 200 shares Primo Pork Rinds and each of your shares is valued at 60 dollars each. Suddenly Primo puts out the word that it's offering its investors a 2-for-1 stock split. Now you own 400 shares, hurray! But wait, those 400 shares that used to be worth $12,000 before the split are still worth $12,000 after the split! Quick, call my broker!

Here's what happens and this is why stock splits aren't what they seem: based on the divisor of the split (2-for-1 in this case) the market automatically marks down the price of the stock. So that $60 a share for Primo Pork Rinds is now worth $30 per share.

There are other split variations on the market. For example 3-for-1 and 3-for-2. Generally speaking, the 2-for-1 split is the most common.

Stock splits keep the price-per-share down so potential investors don't get scared off, while at the same time increasing share volume. Yet the overall value of your shares stays the same.

Bottom line: keep your eyes open when it comes to stock splits. It just could mean that something may be going wrong with the company

 


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