Why are Shares Split?

When a company's shares are split, outstanding shares multiply. The shares are divided and the price is reduced. Say you have a twenty dollar bill, and somebody offers to give you two ten dollar bills in exchange for it. That's the same concept applied to share splitting. You have the same amount of money, only split into two smaller denominations.

Why would a company split its shares if the value of the security remains the same? There are several reasons. Since splitting shares increases the number of outstanding shares, this lowers the bid/ask spread and results in increased liquidity.

Another reason is appearance. A stock with a very high price puts off investors, and they feel that they cannot afford to buy it. Splitting a stock cuts down the price to a more appealing value. Remember that the stock's actual value does not really decrease or increase, but the resulting price is now more "enticing."

Splitting shares also give investors the feeling that they have more shares to trade when the price rises.

Advantages

Stock splits are generally surrounded by a "positive" market perception, despite the stock's fundamental value remaining constant. Some traders feel that stock split is a good buying indicator since it comes on the tail of a stock price increase.

Just because a stock is split does not mean that it is a good stock to trade. Again, note that the stock's value remains the same pre- or post-split.

Like all investments, factor in other variables in your financial goals before making a decision.