There are some simple principles to learn before you know how to understand stock splits. Knowing the definition is only some of the understanding. The what, why and how a split affects stock ownership, investing, and cost basis will be discussed in the steps below.

Investing can be challenging, but knowing all you can before making a financial decision will help. When you buy a stock, you buy it with the hope that it appreciates and with the upward movement you realize and enjoy the profit. And before you buy it there is research that should be done so that you know what you need to know about the company. Keeping accurate track of a stock’s price can only be done if you understand stock splits. While the value of the company or the shareholders value remains the same there are some changes to the stock.

Splits can have their advantages and disadvantages especially in what are called reverse splits. This page will explain how a stock can split, why a company would want to have a stock split, and how the change in price can affect the stock and shareholders. This page will also provide examples of stocks that have used stock splits to enhance their shareholders value.

Every share of stock represents ownership of that company for which the share is issued. Therefore you own what percentage that share represents no matter how small. A stock split as made clear by the Security and Exchange Commission SEC is does not dilute ownership.http://www.sec.gov/answers/stocksplit.htm Every share holder is affected the same. Unlike new share issues which dilutes ownership.

Splits can be two for one, three for one, three for two or any combination including a reverse stock split. Two for one means share holders receives two shares for every stock owned and three for one three for one means you get three shares for every stock owned. A reverse stock split reduces the number of shares for how many shares are owned.

Common stock splits:

2 for 1

3 for 1

3 for 2

3 for 4

Example

Wal Mart (WMT) began with an initial issue of 300,000 shares in 1970 priced at $16.50 and since then they have since had 11 two for one splits and the shares were priced at $89.75 on the last split date of March 1999. http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-dividends A hundred You can see buying one share of stock at $16.50 in 1970 would give you 2048 shares valued at $89.75.

While a stock split is often considered beneficial it does not mean you are getting any new money only the chance to make more, but only if the stock continues to go up.http://www.fool.com/DDow/1999/DDow990810.htm

A stock starts at a price where individuals can purchase and sell the shares easily. Even while some companies might start on the smaller side of their capitulation, to be listed in any of the stock markets must meet certain standards for size. For the NASDAQ market those requirements are (1) Stockholders’ equity of at least $2.5 million; (2) Market Value of Listed Securities of at least $35 million; or (3) Net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years.http://www.nasdaq.com/about/NLHRCDecisions2009.pdf

So you can see that even a company worth $35 million would need to have enough shares to get the price where the common investor could afford it. Then if the company did well those shares offered at the initial price would continue to grow but at some point would reach a level where the price becomes unaffordable to trade where investors have come to expect. At that time a stock split is usually issued.

Example Microsoft, (MFST) first split of 2 for 1 occurred in 1987 when the price reached $114.50 and since then the stock has split six more times at 2 for 1 and two times at 3 for two. http://www.microsoft.com/msft/FAQ/stocksplit.mspx The price has maintained a price range where investors can afford to trade it.

There are two how you need to understand: the first is how the company performs a stock split and the other is how you, the shareholder or investor can keep up with the splits both historical and potential.

When a company decides to have a stock split they have to make a formal announcement to both shareholders, to the markets they are listed in, and SEC. A date and type of stock split will be set so investors can adjust their plans with investing in the company. A list of potential and recent stock splits can be found at the Internet sites where the stocks are listed. Another place that stocks splits can be found is the financial reporting places like, Yahoo Finance, Bloomberg or others.http://www.stanford.edu/dept/OOD/RESEARCH/top-ten-faq/how_do_i_find_an_historical_st.html

Remember, the dividend (if there is one) is adjusted to match the share price. Therefore a dividend that was 20 cents a share becomes a 10 cents a share after a 2 for 1 split. http://www.sec.gov/answers/stocksplit.htm

One problem for investors is keeping up with historical stock splits. The company’s websites are a good source for both dates and the prices of the stocks on the dates of those splits. This can be valuable when you are thinking of buying or selling a stock. or have already sold stock and need to report the profit to the IRS.

Example Berkshire Hathaway (BRKA) announced a 50 for 1 stock split for their class B shares which lowered the price from around $3300.00 to around $66.00 each while the Class A shares remained over $100,000 each. http://money.cnn.com/2010/01/20/news/companies/berkshire.split.fortune/index.htm