Stock Split Increases Shares, But Not Value

In general, when a company splits its stock, it gives its stockholders more shares than they had before.

But that’s not necessarily a benefit, because the price per share usually adjusts accordingly.

As a result, a “stock split” typically leaves a shareholder in the same position, financially, as he or she was before.

Here’s an example: Suppose you own 100 shares of a company’s common stock, and the company declares a 2-for-1 stock split.

When the split takes effect, you’ll wind up with 200 shares, instead of 100. But even though you end up with more shares, the price per share drops.

In this example, suppose the stock is trading at $100 a share before the split. The value of your holdings is $10,000.

After the split, you’ll hold 200 shares, but the price per share adjusts to $50. So, the value of your holdings is still $10,000 after the split.

Why do companies declare stock splits? Simple. If the market price per share is lower, more individual investors may be willing to buy.

Here’s why: Many individual investors like to buy stock in “round lots” of 100 shares each, mainly for convenience and efficiency.

If a stock is trading at $100 a share, and an individual investor wants to buy 100 shares, it’ll cost $10,000 before commissions and other costs. But if a stock is trading at $50 a share, and an individual investor wants to buy 100 shares, it’ll cost only $5,000 before expenses.

This might make the stock more attractive to investors who don’t already own it. And if more investors buy the stock over time, the market price should gradually increase.

Chartist selects funds

After more than two years on the sidelines, Dan Sullivan, editor of the Chartist (310-596-2385), a newsletter with an excellent long-term track record, recently turned bullish. Sullivan might have goofed lately on market timing, but he’s a proficient picker of mutual funds. His new list of five merits close attention.

It’s a good, diversified portfolio: Columbia Common Stock, a steady large-cap growth fund; Janus Balanced, a low-risk fund split between bonds and blue-chip stocks; Lindner Growth, with a long time horizon; PBHG Emerging Growth, hot small-cap stocks; and 20th Century Vista, high-risk mid-caps.