As a company grows, its stock may rise in value. Eventually, the value of the shares may greatly exceed that of comparable stocks or become unaffordable to all but the most affluent investors. For example, a company whose stock reached $150 per share in an industry where comparable shares sold for under $100, might split 2-for-1. Current shareholders would then own twice as many shares, but each share would be worth only $75. This new, lower price could also lead to more shares being sold . You can never forecast a stock split with certainty, but a company's performance and strategy may suggest the increased likelihood of a split.
1. Compare the company's stock price to the industry average. For example, suppose the company split its stock five years ago when its stock price was triple the industry average. One possible time to expect a new split is when the price again reaches triple the industry average. A company would target a typical stock price to encourage additional investment.
2. Note whether the company wants to broaden its shareholder base. When company reports suggest a desire to expand its base, the firm may well consider a split, which will increase its number of shareholders. Stock exchange listing requirements require that companies maintain a sufficiently large number of shareholders. Broadening the base also decreases the stock's volatility.
3. Consider the type of investors that the company aims to attract. If the company wants to draw more small investors, it will more likely split its stock. Small investors cannot afford very expensive shares, and when they buy shares in lots, they seek discounts from buying multiples of 100. The company will not split its stock if it wants to stay with larger investors who favor long-term investment over speculation. Larger investors prefer expensive stocks that reduce the transaction costs from buying many small shares.
4. Factor in the company's equity demands. Apart from all of a split's other effects, stock splits attract investors who think splits precede price rises. Splitting the stock may signal that a company expects such a rise, and the rush of new investment often makes this a self-fulfilling prophecy. So when other variables point to a stock split, a company may likely split the stock when it seeks a new rush of equity.
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