from RB: By: annpayt
Reply To: None Thursday, 18 May 2000 at 10:44 AM EDT
Post # of 318600
This explains why a large # outstanding shares will work in our favor: (see my bold)
Understanding Stock Splits
by Skip Kildore
May 17, 2000
What is a "Stock Split"
This brief article is for those that aren't clear about what "a stock split" is, and are maybe a little shy to ask. You see commercials on the TV, where goofy girls are screaming "three for one" ... they must be excited about something, right? There is a lot of hype surrounding "stock splits", and most of it is just that: Unwarranted Nonsense.
Here's why: After a split, you own just as much of the company as you did before the split.
Here's an example: as graphic as it can get. Say you've got a pizza. Suppose it is only cut in four pieces. Well, you could take a pizza wheel and cut it again... and have eight pieces ! That's a 2 for 1 pizza stock split!!!!
But you see, you still have the same amount of pizza...
Now that you've got that straight, There are reasons why a stock split may be a good thing after all (and by "good", I mean rewarding monetarily). One of them relates to the possibility that a particular company may prefer that its stock trades in a certain range. For instance, the AOL, LU, CSCO, INTC types seem to prefer that their stock stay roughly between 50 and 100 dollars in share price... which is to say that if and when their stock trades much above 100 dollars for a length of time, they tend to declare a split. Yes, there is still the same amount of Pizza, at the moment, but, the company splitting the stock is in effect saying "This will be trading beyond the preferred range soon, and as we expect it to go up higher still, we'd best split it." If the company expects that the stock will go substantially higher, there is a fair chance that it might: Not many people, if any, know the company and its prospects better. Another reason that a company may wish to split it's stock is that increasing the number of shares may be necessary to create liquidity. What's Liquidity? Liquidity is the ease with which a stock can be bought or sold at the going price. The more shares trading in a day, the more likely you will be able to sell yours, or buy yours, at a fair price. But if the stock is only thinly traded (not very liquid) and you have a substantial (say a few thousand shares) amount to sell, even offering it for sale may have the effect of driving the price down. Even, you may not be able to find a buyer at all, at a reasonable price.
When this kind of liquidity is the rule, the big investors will generally decline even a good company at a low price.... they may put tens of millions of dollars toward a stock that they like... so there better be enough of it. They don't dare own a stock that they can't move. So, if a company thinks that its future income will warrant it, they will split out the shares several times, as the company grows, in part, perhaps to keep in a trading range, but you also have to have enough shares out there, or the demand drops off dramatically.
Stock splits are typically "2 for 1" where each share is divided in half, but also, "3 for 1" and "3 for 2" are not too uncommon. Occasionally, a company will fall on to bad times and do a "reverse stock split". Often those are "1 for 10" or worse... where you get just one share for every ten that you owned before. Typically, these reverse splits occur when a stock goes under a dollar, and risks not being traded on any of the exchanges. The reverse split makes each share worth ten times as much, so to speak, (though remember, you only have one tenth as many shares), so it is a common ploy to avoid delisting.
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