If you are an investor in the stock market or are thinking
of becoming one, then you should be familiar with the term “stock splits” and
what it means. It is not at all uncommon for large corporations to split their
stocks, sometimes several times over, and this sometimes makes investors
nervous. However, there really is no reason to be nervous, especially not if
you understand what stock splits are and how they affect you and your
investments.
Understanding Stock Splits
Basically, what a stock split does is to lower the price of
shares without affecting the ownership interests of investors. In other words,
when a company chooses to split stocks, you won’t lose any of your stock; its
value will stay the same, but it will be divided into more and smaller stocks
but still totaling the same value. So, as you can see, if a stock split occurs
with a company you have a stake in, you really have nothing to worry about.
Why Do Companies Split Stocks?
Even though you will not be negatively affected by a company
that splits stocks, you may be wondering if it’s a sign of some kind of trouble
within the company or if it means that you should “get out while you can.”
Thankfully, though, the opposite is true.
Companies tend to split stocks when their shares have gotten
expensive and they’re hoping to re-introduce liquidity into the market and make
their stocks more affordable to investors, all in an effort to get more
invetors.
In other words, splitting stocks is a sign that the company
you have invested in is doing quite well and that you’ve made a great choice,
which is why you shouldn’t worry one bit if you hear that a company you’ve
invested in is making this move. Instead, you should celebrate and congratulate
yourself (or your broker!) on a well-chosen investment.
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