The First Cut: Recent Stock Splits
Stock splits are often announced with great fanfare and strong press coverage. A positive stock split partitions the outstanding shares of a corporation into a larger number of shares accompanied with a proportionate decrease in share price, without affecting the overall shareholders equity or the total market value. For example, if you own 100 shares of a company that trades at $90 a share and it declares a three-for-two stock split (a split ratio of 1.5), you will own a total of 150 shares at $60 a share after the split. If the company pays a dividend, the dividends paid per share will also fall proportionately.
Why do companies split their sharesand why should you care? While stocks normally get a small boost from announcing a split, more importantly splits follow a period of strong price performance. Companies generally try to keep their stock price within a certain range. A stock split announcement represents a vote of confidence from the board of directors that acknowledges a companys stock performance and signals the board feels that performance is going to continue.
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