I think when doing anything that has a desired end in mind it is crucial to gain as much information as you can so that you use you time effectively. There is a big myth out there in the stock market when it comes to stock splits. A stock split would imply that a given stock holder would get twice as many shares as he or she originally had.
The common mistake made by those who do not understand splits is the notion that the stocks hold the same value after the split. This is not the case. The actual value of the stock is split in two. In other words it is now only worth half of what it used to be. This is very important to understand. As a consequence the value of the stock is the same as it was before the split.
The question then is. Why do companies do this? Mainly it has to do with the psychology of the investor. When a stock is very expensive say $80 a share a lot of potential investors would not buy it because it is so expensive. When the stock is split now it is worth $40. As a result it is more attractive to buy because it is affordable.
Not all stock splits are split in half. There are a number of ratios to determine a split. Some of the ratios include 2- for-1, 3-for-2 and some even go to 3 to 1. Stock splits do not just go one way either. There is also what is known as a reverse split. In this case the amount of stock is reduced. This type of split is less common. The goal of the company here maybe to increase the value of the stock so that they can stave of delistment.
Whatever the case just like anything else, understand the fundamentals of what you are getting involved in. Be informed and make some money.
If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock splits. Learn about stock prices and quotes Simple enough, huh?
Source: www.articlesphere.com
