What Happens When A Stock Splits?

Posted: 21 Feb 2008 | Categories: Stocks Mutual Funds

Have you ever wondered what happens when a stock splits? Is it a good thing for the owners of the stock or is it a bad thing? What should you expect if the stock you own splits?

First, let us look into why a stock splits and what happens when a stock splits. Stocks split normally because they reach a higher than desirable price for the market or because the company does not believe that buyers will be willing to pay the price of the stock. This is a decision that is made solely by the board of directors for the company. Some companies prefer to have their stock split and others don’t like to allow their stock to split.

When a stock splits the price gets cut in half and the owners of the stock double their shares. This means that if you own “X” stock and it is at the price of $50 and you own 100 shares or the equivalent value of $5,000 of the stock. Then, when this stock splits you would own 200 shares worth $25 each for a total value of $5,000. This can be a very exciting thing when it happens.

The stock splitting will not affect the total value of the stock, but it will affect the value of each share. This can be a very good thing for the owners of the stock. Typically when a stock splits it will encourage more buyers to purchase shares and can cause the price to increase again after the split. It also shows that the company has a strong value in the market.

One great example of a stock that has split over and over again and climbed up to a new high price and split again is Lowe’s Home Improvement Stores. This stock has had a history of splitting and has split 5 times in the past 12 years, and yes that is a lot of splitting. The owners of this stock have benefited from a stock that has split and climbed back up in price and split again.

So if you own a stock and it splits, then you can expect to have twice as many shares that are all worth half as much, per share, than before. The total value of the stock will not change and the number of shares will double. So, now you know what will happen if your stock splits. When it happens you should celebrate and be excited about it.

Read more about the stock market and investing here:

Day Trading and Investment Blog

Article Author :Benjamin_R._Ehinger