Are Stock Splits Good or Bad for the Company and You?

Stock splits are conducted every year with various publicly traded comapny's stock. When I was a stock broker I always had some clients either calling me on the phone or coming into my office freaking out that XYZ Corp was going to conduct a 4 for 1 split. Then their excitement would soon fade when I told them that in the end it didn't mean anything good or bad it was just a different way of expressing something.

Say you have a dollar and someone tells you they will give you four quarters for that dollar; is this something to get excited about? No because the end result has you still owning one dollar just with four pieces of money versus one. The same holds true with stock splits.

Each and every company that is publicly traded has a certain number of shares outstanding. So, if XYZ has 10 million shares outstanding and then conducts a 4 for 1 split (meaning for every one share you own you will get four new shares in its place) the shares outstanding will now go to 40 million outstanding. If your shares were worth $40 per share before the split, then the new shares will be worth $10 after the split. The net effect is nothing because while you may own more of the company's shares, percentage wise you still own the same as the shares outstanding go up in proportion to the split. So why even bother?

Many companies will conduct a split when the price of their stock becomes what they view to be too high for the average investor to be interested in. If a company has shares trading at $100, that may be too much for the average Joe, but if those same shares are now trading at $25 after a 4 for 1 split then that same average Joe may take a second look at the stock. In that regard there is sometimes a surge of new buyers after a split occurs, but because the number of shares outstanding has now gone up as well there has to be much higher trading volume in order to move the stock higher.

So in reality, a stock split is neither good nor bad for the company or for you, effectively it means nothing. However, if the mind game does work with the average investor then you are likely to see a small surge in trading volume and perhaps a nice gain in price. Now the real question is do you sell or hold if this happens and the answer will ultimately all come down to how much you believe in the company and what you and your financial advisor decide together.