Hi Susie, I just wanted to make one quick post. I found the following website interesting in light of the recent news. It seems there is more than one way to evaluate the situation.
Regards,
Phil
----------------------------------------------------------
worldfinancenet.com
Stock Splits
A number of stock splits have been in the news lately. Typically, a company does a two-for-one or three-for-two straight split. Sometimes you hear of a reverse split. Several of our subscribers have asked if this is simply hype or if there are benefits to investors from a stock splitting and what these benefits might be.
Imagine that you own one share of XYZ Company that is valued at $100 per share. XYZ Company now announces that it will split its stock two-for-one. This means that for every one share you own, XYZ will issue you an additional share. Assume they announce the split will take affect on June 17th. The 17th of June is called the Record Date. If any person owns or acquires a share of XYZ Company on or before the record date, then those shares will be subject to the split.
Before the split you owned one share of XYZ Company, with a market price of $100. On June 18th, you now own two shares of XYZ Company that are worth $50 each. From an accounting perspective, you have neither gained nor have you lost any value in your XYZ Company holdings. The value remains unchanged by the stock split. From the perspective of the Internal Revenue Service, the stock split is a Non-Taxable Event.
Company Benefits: a company will split its stock in order to make the price of their stock more attractive (affordable) to investors by, in effect, dropping the price of the stock. A prospective purchaser of XYZ Company can now pick up a share of stock for $50.00 post-split. The potential is for more investors to begin buying the cheaper stock, creating activity and momentum for the company. For example, each time Microsoft gets too expensive for the average investor, they split the stock, and lots of new investors get in. There is a psychological aspect to lowering the price of a share in a company through a split, especially one that is popular or in a popular industry. Even though the actual value of a share is halved through a split, the impression to buyers is that they can now get a share of XYZ for half the price. Depending on the company and its industry, a share?s price can begin to rise right after a split, and in many cases can, over time, go back to where it was pre-split.
Investor Benefits: shareholders of XYZ Company now have twice the shares they did before. Assuming the cheaper price entices new investors to buy, the activity in the stock will naturally cause the price to begin to rise. In the long run, as XYZ Company does well and the value of XYZ stock increases, then having more post split shares in your portfolio will have a compounding effect on your entire position in XYZ Company. If the share price climbs back to where it was pre-split, you have doubled the value of your holdings.
The Reverse Split is a slightly different animal. Let's say that you own 100 shares of XYZ Company with a market value of $1 dollar per share. The company announces a reverse split of one-for-ten with a record date of June 17th. On June 18th, you now own 10 shares of XYZ Company at a value of $10 per share. The value of your XYZ holdings, post split, is equal to the value of your XYZ holdings pre-split: $100 dollars.
Company Benefits: there is a concern (fear) among many investors over investing in too small a stock. The company simply may not appear legitimate. There are also tens of thousands of money managers and mutual funds which, by charter, are prohibited from investing in common stock priced below $5 or $8 dollars per share. Likewise, stocks which sell below $8 per share are not eligible for Margin Trading. By engaging a reverse split, the price of XYZ stock is now compliant with minimum price parameters. The market should see a dramatic increase in sales volume in XYZ stock and perhaps several more market makers will support XYZ stock, purely because more entities can buy XYZ. The average investor will have more respect for the stock and they will be more inclined to buy.
Investor Benefits: because the new price of XYZ Company makes it attractive to a larger number of potential buyers, the volume of sales should increase. This will allow present investors to sell their shares, or to hold on with the hope that the increased popularity and activity will drive the price higher.
There is no guarantee that a split will increase the value of a company's stock, but in many cases it is an effective tool to do just that. |
