Stock Splits, Real Value or Paper Magic?

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  • Stock Splits, Real Value or Paper Magic?

There is zero economic benefit to a stock split. There is tremendous emotional benefit for the novice investor, not the professional or institutional investor. When buying stocks or shares of a company, the price per share is not important. The price of the whole organization is indeed important. Let’s look at a local example. You want to buy a local business, Joe’s bar and grille. Joe is asking $100,000 for the place. You are paying $100,000 per share because there is only one share. If Joe sells 100 shares, they are priced at $1,000 each. With 5,000 shares, they are $20 each. Any way you slice it, the product of the number of shares and price per share will be $100,000. What’s the price of the place? It’s still $100,000.

Joe is selling 5,000 shares at $20 per share today. Tomorrow, he declares a 2 for 1 stock split. Tomorrow there will be 10,000 shares at $10 each. Has the price of the business changed? Either way the price of the business is $100,000. Many people are under the false impression that after a stick split, there is an immediate return to the investor. This is a case of paper magic, not real value.

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