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Microsoft Corporation Message Board

  • KevinInCA KevinInCA Dec 8, 1997 7:04 PM Flag

    Stock Split: Correction

    >> Correction: A stock split DOES NOT raise more money for the >> issuer of the stock. The price is
    >> adjusted for the additional shares outstanding after the >> split. The total capitalization does not change.

    Yes, you are correct. However, the price of most stocks
    will rise after a stock split is announced. (Though some
    do fall.) If a stock split had no (indirect) effect on the
    current stock price, I doubt anyone would really care about
    the next possible stock split.


    Kevin

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • The value of the shares after a stock split is an open market value...in other words the company gives you more shares and the open market puts the value on those shares...

      (Many tech investors on these boards are following Silicon Valley suppliers to the DVD industries such as cube and others (for second half '98), Microsoft enemies sunw and orcl, and Microsoft allies intc and perhaps small cap wavo.

    • My take on splits:

      Companies prefer to have more shares on the market. This helps to ensure a broader distribution in the marketplace and eventually less exposure to big holders bailing on the stock.

      Since stocks are generally traded at 1/8 increments. It also makes a growing company benefit more from an up tick in it's stock. For example a 1 point gain on a $50 share is 2% instead of 1% for a share of $100 stock. As a matter of preference, investors
      are happier seeing larger percentage gains from the same nominal point increase. For the same reason, holders of call options would benefit but to a much larger degree. Suddenly their in-the-money call option becomes 2 options and would start earning $200 for every point increase instead of $100/pt.

      Also investors can start to see economies of scale when they hold large blocks of stock. Until recently it was always cheaper to buy and sell stocks in 100 share blocks. So an investor holding 50 share would welcome a split since it would help in reduce transaction costs should he decide to sell his shares.

      To a smaller extent splits help to generate a little more cash from small investors that would prefer to by 2 shares for $50 than 1 share for $100. It gives the illusion that you are getting more for your money.

      Since a split tends to speak to the health of a growing company, stocks tend to get a bump when splits are announced.

      But don't take my word for it. I'm new at this game.

 
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