Market Commentary

Stock Splits

Stock Split

Financially speaking, when a stock splits it is a non-event. There is no addition or subtraction of the value of the company. However, the impact of a stock split is emotional, thus investors and traders react. Two emotions drive stocks, fear, and greed. Splits seem to generate greed.

When a company splits its stock it lowers the price of the shares, and it is viewed as a positive event. Generally, for the executives of the corporation, they feel that the share price rose to such heights they decide to split the stock to attract more modest investors. They want to attract individuals that cannot or will not buy a $500 dollar stock, but after a 5 for 1 stock split will buy a $100 dollar stock. The split itself means that every metric that is measured in per-share numbers splits as well. Earnings per share split 5 for 1, but to the uninformed investor all they see is a cheaper stock price and stock owners now have more shares.

The emotional benefits from a split are not something that should encourage an investor to invest in any company. It’s all about the fundamentals.