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Stock Splits

When a company does a stock split, it changes the number of shares that a shareholder owns, but it does not change the net value of the account. If you own stock in a company that does a 2-for-1 stock split, you will own twice as many shares after the split, but each share will only be worth half as much, so the net value stays the same. For example, if you own 100 shares of Company X and the share price is $70 when they do a 2-for-1 split - after the split you will have 200 shares and the share price will be $35. The value of your holding was $7000 before the split and still worth $7000 after the split.

Although most stock splits are 2-for-1, the split can be executed any way the company elects to do it, such as 3-for-1 or 4-for-1, etc., as long as it is approved by the Board of Directors of the company.

A company will generally split their stock to lower the stock price and make it seem more affordable for people to buy.

Companies sometimes do reverse splits, to raise the price of their stock. If their stock price has fallen dramatically and sells for less than a dollar, a company might do a reverse split of 1-for-10 which increases the stock price tenfold and decreases the number of shares that each shareholder owns to 1/10 of what it was before the split. When the price of a stock is less than $5 per share, it will generally have less interest from institutions. When the price of a stock is less than $1, it may be in danger of getting de-listed from an exchange.

Companies which split their stock are often looked at favorably by investors because it is an indication that the company has been doing well and expects to continue doing well. Companies which do reverse splits are often looked at unfavorably by investors because it is an indication that the company has not been doing well and doesn't have strong prospects for a quick turnaround.

Some option traders like to buy options on companies that are doing stock splits because these companies often have increases in their stock price at several key events during the split process.




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