Stock Splits – Stock Markets

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