August 20, 2011 | In: General

When Is a Stock Split Most Likely to Occur?

Investors shouldn’t care less about stocks splits, because they won’t affect them at all, with the exception when they want to buy the stocks (if they don’t have a flat commission then their fees will be higher as some banks charge a fee/1,000 shares for the basic plan, however, this can work work to their advantage if there is a reverse split). Additionally, splits (or reverse-splits) have zero effect on the options of the stock. All the relative parameters will be divided or multiplied based on the split.

For example, let’s look at GOOG (which still is the second most expensive stock as you can see here) for a moment… Google is now trading at $490, which is, again, quite expensive for many investors. Here’s what might happen: Someone at Google thinks, hey, let’s split the stock in 10, this way we’ll lure many small investors into buying the stock. Another one thinks, I think a better idea is to split the stock to 100, so we can lure even more investors… The board then decides to split the stock in 100 (which is a 100:1 split).

Here’s the information about GOOG before the split:

Stock price: $490.92
Average volume: 4.71 million shares
Market cap: $158.51 billion
EPS: $27.73
Shares: 322,890,000

Here’s what will happen to GOOG after the split (if it’s 100:1 meaning 1 share before the split will be equal to 100 shares after the split):

Stock price: $4.9092 (no rounding will happen, but the market will soon adjust to a round number to the second digit)
Average volume: 471 million shares (the average volume will be multiplied by 100)
Market cap: $158.51 billion (not affected)
EPS: $27.73 (not affected)
Shares: 32,289,000,000 (the number of shares will be multiplied by 100)

Now that I have explained what happens to the stock when there is a split, let me answer the question in the title: When is a stock split most likely to occur?

There are four cases in which a stock split is most likely to happen:

– The stock is very expensive and the company board wants to lure small investors.
– The company is doing very well and has a plan to regularly split its stock in good times (that was the case of Intel back in the 90s when they were used to split their stock in half every other year) to maintain its price level.
– The stock has dropped below the $1 level, which is below the minimum amount to remain listed in the NYSE and the NASDAQ. This is when a reverse split happens.
– The company discovers that it has issued more stocks than it should in its IPO. I think Sirius falls into this category. In this case it will be a reverse split.

Finally, remember this: “A split usually means that the company is in good shape (again, take a look at Intel in the 90s), a reverse split means that the company is in a terrible shape. If you don’t believe me, take a look at AIB and C.”

1 Response to When Is a Stock Split Most Likely to Occur?


Will Apple Stock Split? « Fadi El-Eter

November 18th, 2011 at 10:55 am

[…] I’ve already pointed out before, a split is most likely to happen when the stock becomes very expensive, which is the case of Apple. It is currently one of the top 10 most expensive stocks (Note: This […]

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