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?"
By themselves, stock splits don't add value to a company -- or your portfolio. True, you get more shares, but each 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. They're not likely to split the 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 have become. 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.
For more on the wacky ways of Wall Street, pull up a desk in the Fool's School. And if you wish you had a pro to talk to about your personal finances, then read more about TMF Money Advisor.
