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  #1  
Old 07-24-2008, 04:34 PM
investor investor is offline
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Default split stocks question

Why would a public traded company split its stocks? What is the purpose of doing that?
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Old 07-24-2008, 05:29 PM
trent trent is offline
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A stock split is increasing in the number of company shares, while proportionally lowering their value. For example if you own 1,000 shares of a company called ABC and the company does 2 for 1 split (letís assume that the share price at the time of the split is $60), then you will own 2,000 shares. However this doesnít make you richer , because at the time of the split the company also halved the value of each share and now each of your shares cost $30. If the company pays dividend, this per share dividend will be adjusted the same way as the stock price. At the end the company will have twice as much shares, but the market capitalization right before and right after the split will be the same. Companies can split their stock any way they like, for example 3:1, or 5:3, but the most common stock split is 2:1.

The most common reason for a stock split is the high price of the stock. For example consider the Berkshire Hathaway Inc. (BRK.A) stock price Ė Iíve just checked and itís a little over $117K. Thatís right over $100,000 USD. Now tell me how many investors can afford to buy even a single share in this company? In general when the stock price start to be perceived as too expensive by small investors, the company might consider splitting the stock so these investors can afford to buy it again. Of course Warren Buffet needs to split his BRK.A at least 1000:1 if he wants any small investors .
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Old 03-12-2009, 04:42 PM
financial highway financial highway is offline
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when their stock price goes up too much and they want to lower the price per stock to make it more attractive to other smaller investors they go through a split. it is usually seen as a good thing, however Benjamin Graham warns about them
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Old 03-13-2009, 02:43 PM
Canadian Canadian is offline
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Quote:
Originally Posted by financial highway View Post
...however Benjamin Graham warns about them
I'm curious why did Graham warn about stock splits?
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