Stock Splits - What are they and why are they a thing?
A popular concept in the stock market investing world is something called “stock splits”. These may sound complicated, but we'll explain it in a way that's easier to understand, so hang with me!
Imagine you have a candy bar that costs $10. That's pretty expensive for a candy bar, correct? Well, some companies have stocks (which are like pieces of the company) that cost a lot of money per share/slice of that company, just like that expensive candy bar. Stock splits are essentially a way to make more pieces at a more affordable price.
What Are Stock Splits?
A stock split is when a company decides to make their stock more affordable by cutting each share into smaller pieces, kind of like cutting that $10 candy bar into smaller pieces to make it cheaper for a smaller piece of that candy bar. For example, let's say a company's stock costs $1,000 per share… The company might consider a 10-for-1 stock split, which means they take each $1,000 share and split it into 10 new shares worth $100 each. So, instead of having one share worth $1,000, you now have 10 shares worth $100 each. The total value is still the same ($1,000), but it's divided into smaller, more affordable pieces.
Why Do Companies Do Stock Splits?
Companies do stock splits for a multitude of reasons, but a few common ones are:
To make their stock more affordable for investors. Just like how a $10 candy bar might be too expensive for some people, a $1,000 stock might be too expensive for investors to buy. By splitting the stock, more people can afford to invest in the company.
To attract new investors. When a stock is more affordable, it can make different and new investors who couldn't afford it before more interested. This can be good for the company because it means more people are investing in and supporting that business.
To show confidence in the company's future growth. Companies often do stock splits when they expect their business to keep growing and performing well. It's like saying, "our stock is doing so great that we need to split it to make it more affordable!"
Is a Stock Split a Good Thing for Investors?
This is often a debated topic but, stock splits don't change the total value of a company or an investor's shares. If you owned 10 shares worth $1,000 each before a 10-for-1 split, you'd still have the same total value ($10,000) after the split, but now you'd have 100 shares worth $100 each. However, stock splits could be good for investors because:
It's easier to buy more shares. With a lower share price, investors can buy more shares with the same amount of money.
There's potential for future growth. If the company keeps doing well, those lower-priced shares could increase in value over time.
But remember, a stock split doesn't automatically mean the stock will go up in value. It’s not a quick make a lot of money for the company by splitting shares. The company still needs to perform well and make profits for the stock to increase.
The Bottom Line from Your Zeeland Fiduciary Financial Planner
Stock splits might seem confusing at first, but they're really just a way for companies to make their stocks more affordable and attractive to investors. As a fiduciary financial planner in Zeeland, we always aim to explain these concepts clearly so you can make informed decisions about your investments. Remember, a stock split doesn't change the overall value of a company or your investment. It's simply a way to divide the shares into smaller, more affordable pieces. And while it can be a good sign for a company's future growth, it's not a guarantee that the stock will go up in value. If you ever have questions about stock splits or any other investment topics, don't hesitate to ask your financial planner.
Disclosures:
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual
Stock investing includes risks, including fluctuating prices and loss of principal.