Stock split and shares purchasing. Advisable?

Question

Why do companies announce a stock-split ? Share prices come down after a stock split. So, is it advisable to buy shares after a stock-split ?

Answer 1

I believe the main reason why companies make a stock-split is to increase the 'liquidity' of its shares. Imagine that as investor you have $100 to invest and the stock price of company A is $75. In this case you would be able to buy only one share. In case of 3-to-1 split, that is $25, you are able to buy for all the amount of your money (4 shares). Liquidity make a stock appear artificially less risky. Another benefit is that investors perceive the stock as cheaper and they are more inclined to buy it.

Theoretically, however, a stock-split has no economic impact on the attractiveness or valuation of the stock. Imagine, if you had 100 shares of a stock worth $100 (so you own $10,000 worth of that company). In the case of a 10-to-1 split, now you will own 1000 shares worth $10 each (still $10,000). So, theoretically, and often in real life, there is no much difference, and even if there is, the price could move in either direction. Having said that, investors may perceive this move as a good news (often unfounded perception).

So, I don't advise you to buy shares of a stock only because there is a stock-split.

Answer 2

Ignore stock splits. They mean nothing for typical investor.

Answer 3

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Answer 4

Stock splits are designed to increase liquidity in the share market. They are announced so investors don't panic when they see their share price drop precipitously.

If its a good stock, buy it. Don't worry about the split. However, you should check to see when the last split occurred. If a stock splits every 12-18 months, then take a pass. The company is trying to drive the share price based on stock splits rather than fundamentals (earnings, increasing margins, etc.). Price gains due to these kinds of stock splits are unsustainable.

Answer 5

Companies do a stock split so that small investors don't get sticker shock.  Really, it's inconsequential, and the price comes down because the company wanted it to, not because of legitimate reason.

Stock splits work like this:

I am the CEO/Chairman/President of XYZ Corp.

Our share price is $80/share.

For whatever reason (usually complicated behavioral finance stuff that is more or less irrelevant) our target price per share is $50-$60/share.

I ask the Board of Directors of XYZ Corp. to approve a 2:1 stock split, so our share price will drop to $40 from $80.

2:1 splits are the most common.  From the investors point of view, it means that I now have twice as many shares as I had yesterday, but each share is only worth half as much.

Really, new investors are the targets of a stock split.  If you want to understand why, just consider a real-life company that has NEVER had a stock split in company history - Berkshire Hathaway (Warren Buffet's company).  Their stock  (ticker symbol BRK-A) is currently trading at $130,500.00 PER SHARE!!!  Would you be more likely to be able to come up with 130k to buy a single share, or $40?

Really, that's the only implication of a stock split.  If a company has announced a stock split, it means that they have done well in the past, but really says nothing about how they will do in the future.