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What is a Stock Split? Episode 25

In today's episode, I'm going to quickly talk about stock splits, both regular and reverse. Reverse stocks you wonder? They do exist even though they are rare. Even though this is a relatively straightforward issue, I wanted to cover it a bit for a couple of reasons. First. I never want to assume everyone understands what a stock split is. The second is because it's front of mind as Sherwin-Williams, which is my neck of the woods recently announced a three-for-one stock split. 

You will want to hear this episode if you are interested in...

  • What is a stock split? [1:08]
  • Why split a stock? [2:57]
  • What are reverse stock splits? [3:47]
  • Dates to know when it comes to splits [4:32]
  • This week’s FLASHBACK [5:40] 

More pieces of the same pie

The simplest definition of a stock split is that it is a corporate action approved by the board that increases the number of outstanding shares. Dividing the number of shares into more shares reduces the individual stock price. Even though there are more shares the company's total market capitalization or market cap stays the same.

Imagine you have a one hundred dollar bill and someone offers you two fifty dollar bills for it. Nothing changes for you. When you look at the total you still have $100. You simply have two bills instead of one. No one would get excited about this, but if it happens in the world of stock splits, people do get interested.

Why do companies do stock splits?

There are a couple of reasons. First, as a stock price rises, and may become harder for people to buy. Imagine trying to buy a share of a company with a stock price of a thousand dollars versus one with a price of a hundred dollars. It takes a lot longer to save up for the former stock price. Another reason which is probably more important to the company is stock splits increase liquidity. Stock splits are so common there are even newsletters dedicated to reporting on companies who have splits in the pipeline.

This week’s FLASHBACK: Parachute pants

Do you remember parachute pants? If so, did you own a pair? It's okay to admit it. Personally, I never owned any. Not that I didn't want some but I didn't want to pester my mom for a pair. I never understood them. If memory serves me, they had lots of zippers and I didn't get that. If you did own a pair and can tell me why did they have all the zippers? 

Seriously...drop me an email! 

I mean, where are they functional pockets or just decorative? If functional, why would you need so many? Fortunately parachute pants were not a long-term fad but they certainly made the record books for odd fashion trends of the ‘80s.