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Value Investing: What Is A Stock Split?

In the 80’s we all watched as telephone giant Bell was forced to break up by the US government, on the grounds that it had a virtual monopoly in the telephone and telecommunications market. We also heard stories of stockholders who eventually became quite wealthy, being that their stock was split 6 times. This caused many people to consider trying to predict the future of many companies. Many started to ask, Should I wait for a stock split in this corporation?

Stock splits in the short term do absolutely nothing for you value. Many times corporations will increase the number of stocks they have for sale. If they feel that their stock price is getting to high for the average consumer, they will split the stock to create more cash flow. If you owned 100 shares of a company at 50 dollars a share, after the split you would own 200 shares of the company for 25 dollars a share. The actually amount of the company you owned would not change nor would your value.

Many believe stock splits are a good sign. They think that the stock will eventually have to climb back up to its original price. This is not always true and quite often a stock split can have the opposite effect. When a company splits its stock it can create a lot of buying and selling. This can in itself affect the price of the shares and make the market highly volatile.

Some corporations now have adopted a no split policy. They have realized that the size of the company isn’t the most important thing; it is the company’s worth that is key to importance.

If you want to make money by value investing, then waiting around for a company to split its stocks is not worth it. You end up with more stocks that are valued less. Investors can also come up quite short if the market becomes too volatile and the price of the stock drops down.

The best way to make money with value investing is to find a good company and keep your money there for the long term. By further investing of affordable income and the dividends eventually you will come out with a sizable sum.

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