Wednesday, May 11, 2016

Investment Essentials: Stock Splits

Stock splits are something that I have been burned by in the past. That being said, I want to make sure to share what information I have about them so that all of you can learn what to look for when one is announced in a stock that you may own. Overlooking one could mean losing a large chunk of money in the future if you're not careful about what type of split is happening.

If you are unaware, a stock split occurs when a company wishes for there to be more shares available of their company. This means that they effectively double or triple their shares. If you already own shares, this can be great because you will be given whatever the split is. If you have one share and they announce a 2-1 split, that means that you will afterwards have two shares for every one that you used to have. Given this is the case, the share price would also be cut in half. You would still have the same amount of cash invested but it would be split up more ways into the company. Your half of the pie is still a half but the slices are just thinner.

This is beneficial because it can attract investors that previously thought the company to be too expensive to buy into. Now with lower prices per share, they may be able to invest and drive the price higher. However, this can burn you on the opposite direction. A company could instead issue a reverse split. A reverse split is exactly what it sounds like. You would end up with one share for every two that you have. This makes your single shares more expensive but it achieves the opposite effect and it bars other investors from entry due to the now higher price. As a note: there are few companies that would do this if they weren't in trouble.

Typically, if a reverse split occurs, it means that the company is in trouble. It means that their shares have fallen so low that they feel they need to make them appear more expensive so that they could potentially dig themselves out of the penny stock hole that they are either close to or inside of. If you own a stock, keep up with their voting proxy announcements so that you can be aware when a split may occur. If a reverse split is coming, sell your shares faster than you've ever sold anything in your life - that's just my opinion though. You can take the risk if you really think it might pay off.

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