Buying Stock Around Splits

Is it better to buy a company before or after it splits? That's like asking, "Should I eat this peanut butter and jelly sandwich before or after mom cuts it in half?"

Stocks don't become more inexpensive when they split. True, you get more shares. But each share is worth less. Imagine that you own 100 shares of Sisyphus Transport Corp. (ticker: UPDWN). They're trading at $60 each for a total value of $6,000. When Sisyphus splits 2-for-1, you'll own 200 shares, worth about $30 each. Total value: (drum roll, please) $6,000. Yawn.

Some people drool over stocks about to split, thinking the price will surge. Stock prices sometimes do pop a little on news of splits. But these are artificial moves, sustainable only if the businesses grow to justify them. The real reason to smile at a split announcement is because it signals that management is bullish. Companies are not likely to split their stock if they expect the price to go down.

Splits come in many varieties, such as 3-for-2 or 4-for-1. There's even a "reverse split," when you end up with fewer shares, each worth more. Companies usually employ reverse splits when they're in trouble to avoid looking like the penny stocks they are. If a stock is trading at a red-flag-raising $2 per share and it does a reverse 1-for-10 split, the price will rise to $20 and those who held 100 shares will suddenly own just 10 shares.

Some companies that have recently split their stock include Pixar (Nasdaq: PIXR), Apple (Nasdaq: AAPL), and Shuffle Master (Nasdaq: SHFL). Even some exchange-traded funds (ETFs) have split. Read about them in these articles:

• Pixar Splits
• Apple's Meaningless Move
• More Shuffle Master Split Madness
• What to Do When ETFs Split