# Splitting stocks question



## 1sImage (Jan 2, 2013)

It seems very exciting to me when hearing news that a stock is splitting. I was reading up on McDonald's stock and was thinking.
If the stocks splits 1 for 2 and (lets say) it goes from 100 to 50, is there a mad rush for buying the stock at 50? Is there a lot of action after the day of split on the market? Does this split cause a mad buying day and force the stock up an up at it's new price?

Sorry for the Newb question, I just wanna know what to do when or if this situation happens.


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## doctrine (Sep 30, 2011)

A stock split is advantageous for several reasons.

-The company has likely been successful and the stock price is at multi-year or perhaps all time highs
-Stock splits will increase liquidity; some portion of investors will sell a portion or perhaps all of their stocks after a split (perhaps sell half)
-Stock splits can make a company more appealing to a certain percentage of investors who don't like buying higher share prices. It's easier for a % of investors to buy a stock at $20 rather than at $200

So while mathematically there is no new value, more often than not a company splitting a stock is doing very well. And when it's announced, investors will swoop in to bid up the price. This usually happens in the day(s) or week(s) after the announcement and usually well before the actual split. The longer term effects will take longer to see and there likely won't be any abnormal activity when it actually happens. 

For example, Canadian Utilities (CU.TO) and ATCO (ACO.X.TO) will both be splitting their stocks in June/July after a shareholder vote in May. Both stocks rose about 7-10% on the news, a big jump for utility-like stocks, even though the split won't actually take place for months. In fact, there's a good chance the stock might even return to its pre-split announcement price if the general market sells off in the next few months.


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> A stock split is advantageous for several reasons...


That's the positive version of a split.

As you note - a lot depends on the share price and what it does in the future. A 2:1 at $40 where the share price after split drops to $15 is not so great. The same situation where the after split settles in around $25 is a good thing.


If the business drops off enough, I've see where a couple of years after the 2:1 split, the business has deteriorated to the point of a 1:5 reverse split is done (i.e. give in 5 shares and get 1 new one back). Not that I think McD's is in this position.


Any rush to buy at the after split lower price depends on what the market thinks of the split and more importantly, what is thought of the business prospects going forward.


Cheers


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## donald (Apr 18, 2011)

I've read(and this is only on spec plays,mcd/ko sect wouldn't fit the bill)is splits are great when management/insiders want to unload on nice volume/good conditions.
Offering a nice "gift"to the public.....at the end of a cycle.....its the other thought of a split.I don't know how much truth is in that with large caps-both my abt/ko have been a-ok after a split.
Funny I also read a stock breaking a large physcological number like 100 is suppose to be very trend friendly.


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## MrMatt (Dec 21, 2011)

Stock splits are pretty much meaningless, it's mostly psychological.
I don't think affordability is a problem, except for BRK.A, and options traders.

You can always buy individual shares.
I've purchased 1 stock of BRK.B, 10 of GOOG, because at the times it represented about $4k, and I didn't want to take larger positions at that time.

Reverse splits are important though, the exchanges have minimum price requirements. A reverse split suggests management doesn't think the stock price will increase in the permitted time period.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> ... I don't think affordability is a problem, except for BRK.A, and options traders.


Maybe for someone who is a sophisticated or an institutional investor. But that's also where investor psychology comes into play. Just as I know several investors who avoid $5 and under stocks, there are those who are also hesitant when the share price gets around $80 or more. 

Based on one of my stocks, in a five year period - if I take out the two 2 for 1 splits, the share price went from $28 to $152 a share. 




MrMatt said:


> ... You can always buy individual shares.


Sure ... but how many outright skip a stock that's had something like a 500% gain in five years or will be intimidated by the share price?




MrMatt said:


> Reverse splits are important though, the exchanges have minimum price requirements. A reverse split suggests management doesn't think the stock price will increase in the permitted time period.


They are also important as less sophisticated investors have looked at the lower, per-consolidation share price and then noticed that the after-consolidation share price was higher. 

They assumed the rise in the share price was improving business and/or market sentiment, without checking the numbers (ex. after a 1:7 reverse split, the new shares should be trading with a share price 7x higher where the share price has stayed the same).


Cheeers


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## none (Jan 15, 2013)

Timely, 2 hours ago Telus decided to do a stock split.


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## Guigz (Oct 28, 2010)

Waiter to patron: "Would you like your pizza sliced in 4 or 8 parts?"

Patron: "Gosh! Slice it in 4, I could never eat 8 parts!"


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## none (Jan 15, 2013)

Exactly.


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## doctrine (Sep 30, 2011)

Yes, it's all very subjective. But, historically, most stock splits occur in successful companies. If you looked at every stock split in the last 100 years, and calculated what the 10 year return was after the split, I'm sure you'd see some great numbers. So, when a split is announced, there is a subjective increase in interest in the company's prospects which is why the stock price goes up. Who wouldn't want to own BNS after their stock splits in 1984, 1998 or 2004?


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## 1sImage (Jan 2, 2013)

none said:


> Timely, 2 hours ago Telus decided to do a stock split.


Anyone have any Telus shares?


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## doctrine (Sep 30, 2011)

I have 141.. soon to be 282.


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## 1sImage (Jan 2, 2013)

Guigz said:


> Waiter to patron: "Would you like your pizza sliced in 4 or 8 parts?"
> 
> Patron: "Gosh! Slice it in 4, I could never eat 8 parts!"



+1.00 × 100 shares= or +1.00 ×200 shares... 

Sir sir, I'll have the 8 slices please.


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## 1sImage (Jan 2, 2013)

doctrine said:


> I have 141.. soon to be 282.


Does this split make you happy or worried?


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## doctrine (Sep 30, 2011)

I'm not worried at all. I'm fully expecting a dividend increase to 67 cents next quarter, and to 70 cents a quarter in December (pre-split). In May, they will announce their dividend policy through 2016. It will be interesting to see what they say. The last stock I had that split was Enbridge, which just about doubled in the next year, and before that Bird Construction, which is up about 40% since the split.


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## none (Jan 15, 2013)

doctrine said:


> I'm not worried at all. I'm fully expecting a dividend increase to 67 cents next quarter, and to 70 cents a quarter in December (pre-split). In May, they will announce their dividend policy through 2016. It will be interesting to see what they say. The last stock I had that split was Enbridge, which just about doubled in the next year, and before that Bird Construction, which is up about 40% since the split.


This is a bit of a noob question but if all of this carried any weight wouldnt these variables be incorporated in the price?

I have 100 shares.


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## doctrine (Sep 30, 2011)

Yes, but it hasn't stopped the stock from increasing at 20%+ a year since 2009. Not that it will necessarily continue to this year and next. I'm just more pleased with the increasing earnings and dividends.


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## humble_pie (Jun 7, 2009)

none said:


> This is a bit of a noob question but if all of this carried any weight wouldnt these variables be incorporated in the price?



this is another one of those investing questions to which there can never be any definitive answer. There is only a continental divide between the arguing camps.

on one side, the random walk theorists who posit that all news is 100% built into all share prices every moment of the time, therefore a random walk will generate as much benefit as a carefully picked portf.

on the other side, the arbs who prove every moment that slight irregularities in pricing do exist & they arbitrage to capture profits from these.

a vast spectrum in between the 2 points of view. The route over the mountain pass of the continental divide is long, twisty & snowbound much of the year. But upwards we toil & trudge.


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## none (Jan 15, 2013)

Thanks for the responses. I'm dumping Telus. bu-bye.:stupid:

Just dumped it ay 69.75. - Bought at 31 a few years back. <BOOM>.


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## purple.platypus (Dec 10, 2012)

If everyone were rational, stock splits would be recognized as purely symbolic, and would probably never happen save perhaps when a share price gets so high as to become unwieldy to new investors.

In the world we live in, where so many things are driven by emotional, arational or downright irrational, concerns, _especially_ investing (efficient market hypothesis be damned), they're generally seen as a very strong positive sign. Companies mostly only split when they, or at least their stock price, is doing really well.

Just watch out for cases where the stock price (pre-split) has shot up out of proportion to current or realistic future earnings. That might indicate that it's time to sell high. But that's true whether there's a split or not.


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> Maybe for someone who is a sophisticated or an institutional investor. But that's also where investor psychology comes into play.


Like I said it's mostly psychological. You don't have to be all that sophisticated to realize that the share price alone is meaningless, and it needs to be interpreted in the correct context.


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