A stock is not a pie.
A pie is limited. Each time it is divided, each piece gets smaller but the whole amount is unchanged.
BEFORE A 2:1 PIE SPLIT
You have a whole pie
AFTER A 2:1 PIE SPLIT
Doesn't make sense, you can't make another pie from nothing.
A stock is a figment of our accounting imagination (Let's use a simple 2:1 split to illustrate):
A stock is unlimited. Each time it is divided, it remains a whole share of stock and the WHOLE AMOUNT IS DOUBLED. However, it's value is HALF what it was. In effect, NOTHING has changed!
BEFORE A 2:1 STOCK SPLIT
you have 100 shares at $50 each with a total value of $5000
AFTER A 2:1 STOCK SPLIT
The number of shares in the market has magically doubled (from
thin air!), with the value of each share cut in half.
you have 200 shares at $25 each with a total value of $5000
the total value remains the same.
Now, there are two general reasons to do stock splits (of course there are more, but these are the top two):
1. To make the stock more affordable for individual investors. IMHO, this used to be a crock because institutions did all the trading and they couldn't care less if they paid $50 or $5000 per share if they had $500mil to spend. These days, internet stocks especially, are traded more by individuals. Making the stock affordable is important.
2. To increase ownership in the company -- a safety factor for a company to avoid being taken over -- if each shareholder owns a tiny, tiny piece of the company, chances are slim they could get together and take over control.
Also, as with your example with DCLK, you must be VERY careful to compare ALL results either on a pre-split basis or a post-split basis. It makes no sense to compare a pre-split result with a post-split result. |
