Investing in this modern world is a full time occupation. Even if you’re just invested in your company’s stock through an employee purchase program, it’s good to be mindful of the day-to-day action of the company’s share price, stock news, and other activity. Some of this potential stock news or action could be that your stock is going through a stock split.
Stock Splits Intro: Stock splits are common enough so that, particularly if you’re a long term, buy and hold investor; you typically don’t need to be all that worried. In fact it could be a good thing! If holding for long enough and you’re getting more shares, you could be doing really well. However every time you hear about a pending stock split you should take notice. You will get news of a shareholders meeting or a proxy statement where you and your shares have the ability to vote on whether or not this stock split should occur. You would be wise to look for that proxy in the mail or go to that shareholders meeting and make your voice heard because stock splits can also have adverse action in the short term which could cause you to lose your cool and maybe your shirt in the process!
What is a Stock Split?: Publicly traded companies have a certain number of shares of stock outstanding. When a company decides to do a stock split they are increasing the number of shares of stock. For example a 2-to-1 stock split means that if you hold one share of stock, you would now hold two. So if there are one million shares outstanding at the time of the split, there will now be two million.
What Are the Effects of a Stock Split?: A stock split can be good or bad. A bogus flailing company in need of desperation capital can approve a stock split, flood the market with shares of stock, and cause dilution. Like when you put too much milk in your coffee or too much vodka in your screwdriver, dilution in the stock market can be bad. Ownership of shares of stock is something of an exclusive club; when more shares are available, demand is not there so the price can go down. Now if you’re invested in a solid company and this is a well-timed stock split, then your share price will likely recover to at least half and then quickly back up from there.
How Should You Handle Yourself When a Stock Split is Eminent?: You need to be wary of stock splits; particularly if you have pre-set sell orders in place. A stocks price can go on a wild ride for a period of time preceding and following a stock split. If you’re a day trader, then you depend on these swings. If you’re a long term investor with pre-determined exit points, you may wish to take off any automatic sell orders and see where things settle. The alternative if you’re already up is to sell your stock before the split and maybe buy back in once you feel a bottom has been reached.
Stocks are not for everyone and the stock split is a part of the program. If you navigate the waters adroitly you can often ride the waves ahead of splits, sell at a profit, and get back in when a bottom has been reached. If you’re not keen on that volatility but you still don’t want to sell for several years then your best bet is to turn your brokerage monitor off and go about your business until the chatter about the stock split has died down.