The theme this week on the Retirement Quick Tips Podcast is: Understanding Stock Splits
Today, I’m covering the basics and talking about stock splits 101 - what is a stock split?
A stock split can take on many forms. Most commonly, I see 2 for 1 stock split, which means that for every 1 share you owned previously, you’ll now own 2 shares after the split. And before you get all excited thinking that you’ve doubled your money, the company will also halve their stock price in this split.
So essentially nothing happens with the stock market capitalization. There are now twice as many shares outstanding but the stock price has also been reduced by half.
On the flipside, some companies will do a reverse stock split, which is exactly the opposite. Using the same 2 for 1 split example, in a reverse split, the company will reduce it’s # of shares available by half and then the stock price will double.
While regular stock splits aren’t good or bad in and of themselves, reverse stock splits can be major red flags. When stock prices fall too far they can become delisted from the exchange they trade on which have minimum share price rules. So if the stock is trading for $1, then a 1 for 2 reverse split that doubles the value per share to $2 can keep it from being delisted, and create the perception that things aren’t so bad by artificially boosting the stock price.
But it’s not just 2 for 1 stock splits. Traditional stock splits and reverse splits can take a number of forms like the 3 for 1 split in Disney stock that I discussed yesterday, or the 20 for 1 stock split that Amazon that will take effect in early June.
Tomorrow, I’ll talk about why companies would want to split their stock, but for today, I just wanted to lay the groundwork to explain stock splits and how they can take on many different forms.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance