When you hear the word stock split some people immediately think about the worst possible scenario that could arise. While your stock splitting is bad news, you need to be informed of exactly what is happening to your stock. The first thing to realize is that when a stock is split, the amount that you had invested in the company does not change.
It simply means that you are now the holder of two stocks which has been split from one. A company can cut a stock down to as low as a penny but they cannot force you to get rid of your stock because of the split. The value of your stock always has to be positive for the split to occur.
The reason behind doing this is to create more shares of the same company so that more people are able to invest. Basically the company wants more money. A company is only able to have a set amount of itself, namely 100%. If the company wants to make more money, it needs to sell itself. Some people will be willing to buy a stock in a company for $100. They see no problem with doing this if they know that the company is doing or going to do well. Let's say that half of the amount of stocks available for buying are bought for that amount of money then no one else wants to take the risk of $100. So the stock is then split into two (or more) shares. Each share can now be bought for $50. Other investors who were wary about the company before will now think that that is reasonable to be bought. So they will buy a share in the company for $50 now.
The previous investors will now have two $50 shares instead of one $100 share. The stock can then be further split if need be into even smaller shares. You could wind up having one hundred $1 shares in a company.
The amount of money that you will get back from the company profits does not change. 10% of $100 is the same as 10% of a hundred $1 shares. The advantage to having a stock split is actually helpful if you are thinking of releasing some of your money being held in the stock. More people are now going to want to buy the stock and you can sell it to them making a profit. It is easier to sell stocks worth less than it is to sell one stock which is worth more than some people are willing to pay.
If all of your money was tied into one stock, you can now sell the half of the stock that you want and still retain ownership of another. That will cut in half the amount you would receive from the company but it also cuts in half the amount of chance you are taking. Now if the company does bad, you will not have to worry about losing all of your money.
Beware of buying stocks just because it has split. Some companies split their stock so that they are able to lure people into investing in their company because they believe that the company is doing well. When these expectations are not met, the company can then begin to plummet and make the stock you thought you were buying at a great deal become worthless and impossible to get rid of.
The opposite of a stock split could also happen to you with the stock rejoining. This is called a reverse split. This is rare to happen and is not always seen as a good sign. A stock rejoining could mean that the stocks were being sold at too low of a price. When a stock is too low, people are unwilling to take the change on the company because they believe that if a stock is almost worthless than the company is probably close to being worthless as well.
This could also be done to keep a company from becoming delisted from the marketplace. Too many unsold stocks can prevent a company from being listed on a major marketplace because of the lack of impact that they have on the financial world . No one will be interested in seeing how these stocks do because no one is invested in them.
A company can also reverse split its stock so that it is able to push out minority shareholders or to go private. These companies just want to consolidate itself back to almost one entity so that it is able to restructure and then it will probably go back out onto the market.
Overall, a stock split is seen as a good thing. It means the market is rising and people are interested in buying stocks . You should check out the company to see if you believe that it is rising as well and invest.