Stock Split:
Company decides that it’s stock price is too high, and that it is keeping some investors from buying stock, because it is above
the “psychological” price that owners, that’s us, believe people want to pay.
Would you rather save up $60.00 to buy one share or save $30? That’s what it boils down to.
Let’s look at Walgreen’s: I don’t recommend any stocks; I only use my holdings as examples. My holdings may change.
Symbol WAG. Traded on the NYSE. I bought 50 shares in 1996. Each share was worth selling at $29.00 each. I paid a $50
fee to my stockbroker for the transaction. So the total cost of buying the shares was $1,500. This money didn’t go to Wag; it
went to the individual who sold me the stock from the auction.
That means each share cost me $30.00. That’s how it gets recorded.
In 1997, Wag stock was selling at $60 per share! The owners, me included, thought that this was too high. We instructed the
management we hired to do a split in 1997, on 8/8/1997, 2 for 1.This means for every 1 you have, you now have 2 shares. 2
for 1 is the proportion.
Let’s set up the proportion and solve for x, the number of shares we now have. Please see the “line” as the word for, and
always put what you own in the denominator.
2 for X
1 you own 50 you own
Cross products
2 X
1 50
2 X
1 50
1(x) = 2(50)
x = 100
So now I have 100 shares.
Now the value of the stock doesn’t change, just the number of shares. So in my case I had 50($60) = $3,000 before the split.
After the split, I have 100($30.00) = $3,000.
A quick way to determine your share price from a split is to multiply the share price before the split times the reciprocal of the
2 1 1
split. With the above example, we had a 2 for 1 or split. The reciprocal of this is . Multiplying ($60) yields $30.
1 2 2
WAG did it again in 1999, 2/12/1999, split 2 for 1. So now I have how many shares?
200!
The price before the split was $60. The price after the split was?
$30
So my initial investment of $1,500 has grown to $6,000. Money doesn’t do that in the bank!
Is this guaranteed? No, that is why you have to do your homework and find companies that are in the right business and are
well run. I have 200 shares today, plus the shares I get from my DRIP, Dividend Reinvestment Program. Instead of sending
me a check for my dividends, Walgreen’s buys me partial shares with this money. Automatically, no hassle, and very little fee.
I can even send in additional money to pay shares and by pass using a stock broker.
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Secondary market is the auction. It is where Mike Wade sells his shares in Walgreen’s because I need the money to pay for a
wedding for my daughter. I want the money! So, I call up my broker, and say- Sell WAG, with a low end of $35. All the
money, less commission comes to me, or my daughter elopes. None goes to Walgreen’s. They got their money in the IPO,
Initial Public Offering.
Now who buys my stock? Someone like you who think WAG price will go up, they will continue to pay dividends, and his
money is better off in the stock of this company then in the mattress.
Splits can be 3 for 2, 5 for 3, 11 for 10 and in some cases a reverse split occurs. When the price of a stock falls so low that it
might be “delisted’ from the stock exchange, the company will say for every 2 shares you have at $1, we’ll change them into 1
share worth $2.00. This is a 1 for 2 reverse split. Poof, magic, legal. Recently AT&T did a reverse split for I believe 1 for 4.
Lucent announced a 9 for 1 reverse split. The highest reverse split I have heard of is 1 for 341! That’s right, for every 341
shares you own, you will have 1 after the reverse split.
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