Historical Stock Splits Confound The Greatest Of Wits
There are many terms thrown about when discussing all things trading. It can often prove quite confusing. From candlesticks to stochastics, the terminology is endless. So what refers to a stock being cut in half, but not in a bad way? Those are referred to as historical stock splits.
Ordinarily, when you wake up and your stock opens at a fraction of what it was trading the previous day, that constitutes a bad thing. However, that is not always the case. Sometimes there is what is called a stock split. Some claim this represents a great thing for your stock. Others claim it is meaningless.
Let's say you own 500 shares of a stock which was previously trading at $20. That stock does a 2:1 split meaning every one share turns into two shares. When this occurs, you will own 1000 shares and the stock will trade at $10. Do the math. Is there really a difference?
Splits can come with many different ratios. Some can be three for one. Others can be three for two. In the end, it doesn't matter. The ratio of your shares increase will always correspond the pro rata decrease in the stock price.
Stock splits can also come in the reverse variety. Sometimes, a company needs to get its stock price above a certain amount. Most usually this is to meet an exchange requirement of a given minimum share price. Failure to maintain this price could result in de listing. Let's say a stock is at $1 and needs to trade above $5 to continue to meeting listing requirements.
That company might then do a reverse 1:5 stock split. In this scenario, assume you owned 500 shares. After the split you would own 100 shares. The stock, at least briefly, would go to $5. The problem with most reverse splits is that the stock quickly heads back where it came from leaving you with a fraction of your former shares but no corresponding increase in share price.
Where can you research if your stock has ever split? All major finance web sites allow you to pull up a chart of your stock. Go to one of these sites and pull up a long term chart. Some give an option saying "maximum time". Then look for the markers denoting splits. Usually, each marker will be tagged with the applicable ratio of that given split.
Historical stock splits are a good bit of information to know. It can help predict when the company may initiate the next split in the future. As indicated, many claim these are meaningless events. Others rush to buy stocks they see splitting in the near future. Whichever side you are on it is best to have the most information about them at hand.
