Rant: Stock Splits are worthless is a bunch of hooey. $$
So, I was reading this article here: http://www.google.com/gwt/n?u=http://feeds.tuaw.com/click.phdo%3Fi%3Df5a7b925d36d464961f19fcb15f6e2ce and I came across this brilliant piece of journalism, "First, for the uninitiated, a stock split is a zero sum game....If a 4 for 1 stock split takes place, you will wind up 4 shares, instead of 1, but each share will be valued at $50. Did you gain or lose any money? No. It's all on paper....'quick buy Apple and you'll be getting 4 times as much'....The case for this sort of stupidity is well made by Barrons."
Using their example of Apple ($appl), it closed today at roughly $230. If you had 100 shares of Apple you made $425 today after it's $4.25 gain. Not bad. However, if Apple had split yesterday 4 to 1 you would have had 400 shares and would have made 4 times the gain (which, in my opinion at $57.25 (the price if it split 4-1 yesterday) the gain would have been much more than $4.25 a share), but in any event, if it did gain $4.25, the same amount of gain, you would have made $1700 profit rather than $425 profit. A HUGE difference for the same investment and the same amount of gain.
So, essentially they are saying stock splits are worthless because they are an even trade. If you have 1 share for $50 and it splits 2 for 1, you now have 2 shares at $25, or $50 worth. An even trade, right? No big deal, right? Wrong. Here's why:
First of all, since the stock price is lower, it has the opportunity to be purchased by more people, driving up the price easier than if the stock is out of the reach of most people. While market makers and funds have 90% of the pull on this these days, it still helps. The more attractive the price, the easier it is to move.
Secondly, and most importantly, this goes back to the Lesson that the number of SHARES means everything!
Let's talk about Berkshire Hathaway B shares ($Brk-B). A couple of weeks ago the stock split 50 to 1. If you owned 10 shares of this stock, you now have 500 shares of the stock. While your value stayed the same, you now gain $500 for every dollar the stock goes up rather than the $10 you were making before. Same investment, HUGE difference. Why people don't see this, I have no idea.
Furthermore, if you put our Lesson about avoiding taxes to use, you can now sell a lot of shares to bank your profit and still have a lot of shares of the stock, whereas you can't do that with 10 shares or 5 shares or even 100 shares.
Using their example of Apple ($appl), it closed today at roughly $230. If you had 100 shares of Apple you made $425 today after it's $4.25 gain. Not bad. However, if Apple had split yesterday 4 to 1 you would have had 400 shares and would have made 4 times the gain (which, in my opinion at $57.25 (the price if it split 4-1 yesterday) the gain would have been much more than $4.25 a share), but in any event, if it did gain $4.25, the same amount of gain, you would have made $1700 profit rather than $425 profit. A HUGE difference for the same investment and the same amount of gain.
So, to all of the peeps that believe a stock split is silly or worthless or has no meaning because you end up with the same amount of investment at the end, you couldn't be more wrong if you tried.
Invest in peace...
