Stock splits not hard to calculate

Q: How do I figure my cost basis when my stock splits 2-for-1? — K.D., Bay City, Mich.

A: It’s easier than you may think. Your basis splits 2-for-1 along with the stock. Imagine that you bought 100 shares of Home Surgery Kits (ticker: OUCHHH) for $50 each, paying a $12 commission. Your cost basis is $5,012 — or $50.12 per share. After the split, you have 200 shares and your basis is still $5,012, or $25.06 per share. Always add the purchase commission to your cost basis and subtract the sale commission from your proceeds — you’ll save a few tax dollars that way.

If you’re paying a lot more than $12 or $15 per trade in commissions, consider finding a less expensive brokerage. Learn more at www.broker.fool.com and www.sec.gov/answers/openaccount.htm.

Q: What are REITs? — G.V., Watertown, N.Y.

A: Real Estate Investment Trusts (REITs) let you invest in real estate without actually buying any property. They’re organizations that combine the capital of many investors to acquire or finance all kinds of real estate, such as offices, hotels or apartments. A REIT is a little like a mutual fund, as its portfolio is professionally managed and diversified, holding many properties, generally income-producing ones. Many REITs trade publicly on major stock exchanges.

REITs have some other twists, too. For starters, corporations or trusts that qualify as REITs generally don’t pay corporate income tax and are often exempt from state income tax, as well. They’re required to invest most of their assets in real estate and pay out at least 90 percent of their taxable income as dividends. In good years, REIT dividends can run quite high, sometimes topping 10 percent. Learn more at www.nareit.com.

My dumbest investment

Many years ago, I was given some shares of Lucent, at the time a darling stock of Wall Street. A few years later, Lucent dropped about 10 percent. When stocks go on sale, one should buy … correct? So I bought 100 shares. Time went on and Lucent went down some more. “Maybe I’d better do some learnin’ before I buy some more.” That’s when I became a real Fool and read some Foolish books. I then bought some more stock — different company, different attitude, better investment. I still have Lucent, and it’s carrying a 92 percent-plus loss. I keep it in my portfolio along with some 200 percent gainers and all the others. It serves as a good reminder to make sure I know what I’m doing. — Rich Hartley, Laura, Ill.

The Fool Responds: When stocks go “on sale,” you shouldn’t always buy — hey may be on their way to being discontinued. You were smart to decide to read up on investing. Knowing more won’t guarantee great results, but your odds of doing well should improve. You can learn a lot online for free, at Web sites such as www.better-investing.org.