The Top 10 Most Frequently Asked Questions
Part 1
April 10, 2000

Every day, The Motley Fool customer service staff answers more than 400 e-mails from inquiring Fools like you. Sure, they see the occasional marriage proposal or offer to adopt one or both of the Gardners, but there are some questions that pop up a bit more frequently. In our attempts to lighten their load and educate more Fools, we've answered the top 10 questions in this article. Special thanks to Judy Ames, Barbara Eisner Bayer, Karen Kosoy, Joseph Richardson, Tim Thurman, and Fool Four Portfolio manager Ann Coleman for answering these questions.

1) Is it a good idea to buy a stock before a split, after a split, or does it matter?

It doesn't matter. Splits are really meaningless, as they don't affect the underlying value of the company AT ALL! They don't even affect your investment except for the temporary value sometimes imparted by hype. For a long-term investor, they are anthills beneath the wheels of his SUV.

A split is just like making change -- like getting two ten-dollar bills for a twenty. If your stock splits two for one, you still own the same percentage of the company, and the actual dollar value of your investment changes not a whit.

People believe that stock splits are worth something because stocks that are growing very fast tend to split their shares frequently in order to keep the price within a certain range. And a good deal of temporary hype and hoopla often accompanies a split announcement. But it's still just like two tens for a twenty. If a company doubles its business and doubles its earnings, the market may very well bid up the price of its shares and the stock may split every time it does that, but it's the growth in the value of the company that makes your investment valuable, not the split.

Helpful Links:
David Gardner on Stock Splits
What Is a "Share"?
A Splitting Headache
More About Splits

2) What is the record date and will I get the split if I buy after the record date?

For an individual investor, the record date is a mere formality. It's the day a corporation closes its corporate books to determine the stockholders who are entitled to the stock split. (Gotta find some way to keep those accountants busy!) The transfer agent (usually a bank) will send the extra shares to investors who own shares as of that date. But -- and this is a big but -- this is only paperwork. The split shares don't become effective until the payment date (also the effective date or the distribution date), which is the date when the split actually occurs. The new price takes effect for trades at the opening of the next market day.

Now that I've given you all the mumbo jumbo, let's drop the mumbo and focus on the jumbo. The question really is, "Hey! Do I get in on the split even if I buy a stock after the record date?" You bet, Fool! As long as you own the stock on the date the equity splits, you're in!

3) I'd like to buy a share of stock for my grandchild. How can I do this?

First, note that a minor is not allowed to own stocks directly. Therefore the share will have to be registered in the name of an adult custodian for the benefit of the child. The custodian could be anyone but typically it would be you or the parent. Ownership reverts to the child at the age of majority, which varies from state to state.

If you already have a brokerage account, you can purchase the stock through your broker and request that they issue a certificate in your name as custodian for the child (e.g., "Joseph Richardson, custodian for Joshua Richardson"). The cost to do this would be the normal broker's commission if you don't already own the stock plus any fees for issuing the certificate. Some brokers will issue certificates for free.

If you don't have a brokerage account, there are a couple of services that can help you. Companies like Moneypaper or Net Stock Direct will, for a fee, purchase the first share for you and enroll your child in a dividend reinvestment plan (DRiP). Not all companies offer these plans but there are still plenty to choose from. Starting a DRiP has the added benefit of making it easy for you to purchase additional shares in the future and also to have any dividends reinvested in additional shares (hence the name "dividend reinvestment plan"). Another company called, geared Foolishly toward the long-term investor, charges $2.99 to buy a share of stock and offers shares in companies that don't offer DRiPs.

Helpful Links:
Investing for Your Kids
Fool FAQ on Drips
Investing Through Drips (Fool's School)

4) Can online brokerages be trusted? Is it dangerous to use one of these companies that charges so little in commissions?

The drop in commissions is directly related to the increase in individual investors and the ease and inexpensiveness of Internet transactions. So a low transaction fee is not indicative of any questionable activities at the brokerage.

Every broker should carry SIPC insurance (similar to FDIC insurance for your bank deposits) which protects you up to $500,000. Most brokers carry additional private insurance. You can check if a broker is insured by searching the SIPC membership database or by contacting the SIPC:

805 Fifteenth Street, N.W.
Suite 800
Washington, D.C. 20005-2207
(202) 371-8300

Remember that SIPC insurance does not protect against a loss in the value of your assets. It only guarantees that the securities in your account will be available to you if your broker folds or flees to Bermuda.

Helpful Links:
FAQ on Opening a Brokerage Account
The Fool's Discount Brokerage Area
SIPC's Website

5) Results in the Rule Breaker are great. How can I buy this portfolio and when should I do it?

We don't believe in following anyone blindly, including us. Our hope is that investors will be able to make their own decisions about the stocks they buy. That's Foolish! The Motley Fool portfolios are real-money portfolios set up for educational purposes. We do not encourage our readers to mimic any of them, including the Rule Breaker. Before investing in any Rule Breaker stock, or any stock for that matter, be sure to do your own research.

Helpful Links:
The 13 Steps to Investing Foolishly
Portfolio Information Page
Rule Breaker Information

Next: Top 10 Questions, Answered Part 2 »