Penny Stock Brokers 4u

Occasionally a company’s Board of Directors with the approval of the major shareholders will make the decision to perform a stock split on their outstanding shares.  The most common stock split is a 2 for 1 split in which the shareholder receives an additional share for each share they own. Other common splits are 3 for 2 and 3 for 1. Less common is a reverse stock split in which you end up with less shares than you began.

What is a stock split? Let’s begin with what it is not; it is not an action that increases the shareholder’s overall basis in the stock. If you began with 100 shares that you paid $10 each for giving you a basis per share of $10, after a 2-for-1 split you will have 200 shares but your $10 buy price is halved to $5 – bottom line is your total basis stays at the same $1,000 you originally invested.

It is also not an increase in the current market price per share since when the split is done the current share price is also revised. Thus, if a stock is trading at $100 per share, it immediately is revised to $50 per share. So, if you owned 100 shares at $100 per share for a total of $10,000 you will now own 200 shares at $50 per share for a total of $10,000.

So if doing a stock split does not affect the worth of the company or the stockholder’s investment, then what is the purpose you may wonder. While not all companies believe it is necessary, some perform a stock split as a way to decrease the price per share in an attempt to make the stock more appealing psychologically. Since some investors tend to shy away from high priced stock, the lowered price may make it seem affordable. In reality, if you have $10,000 to invest, it does not matter if you buy 100 shares of ABC Company at $100 or 500 shares of XYZ Company at $20 because you still have $10,000 invested. Yet there will always be those that prefer to have more shares and will jump on stocks that have just split in the hope they will return to the pre-split price quickly however seldom the case.

There are many companies that do not do stock splits. The most famous of these is Berkshire Hathaway.  Since it was founded in 1839 they have never split their Class A stock even when share prices were at the highest price of $150,000 a share on December 13, 2007.  However, they did split their Class B shares in a 50-to-1 split in January 2010.