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What is a Stock Split?

Splitting stock means that each outstanding share is broken into pieces. For example, in a two-for-one split (2:1 split), if your stock today is worth $50 per share, and you own 100 shares you have:

$50 x 100 = $5,000 worth of stock
After a 2:1 split, you'll have:
$25 x 200 = $5,000 worth of stock.

The reason a company do this is to make its shares more attractive and affordable to a greater number of investors, stock split creates more shares selling at a lower price. Even though stock owners are no better or worse than before, announcements of stock splits, or anticipated stock splits, often generate a great deal of interest. Buyers may simply want to take advantage of the lower share price, or they may believe that the split stock will increase in value, moving back toward its presplit price.

While 2-for-1 splits are the most common, stocks can be also be split 3-to-1, 10-to-1, or in any other combination. In addition, a company can reverse the process and consolidate shares to reduce their number by authorizing a reverse stock split. Reverse stock split reduces the number of shares outstanding while increasing the share price. Most often, companies do this to meet stock exchange requirements.

Why earnings are important:
Earnings of a company are extremely important for a company to be successful, especially for a long term. In a short term, it may not matter as much. The price of the stock over the long term have a direct correlation with the growth of the company's profit or earnings. People who have made money in the stock market usually bought companies that have done very well over time. It may to hard to believe but Wal-Mart was a small company with small profits. But now, they are the largest retail in the world and making billions in profits. So was Amgen, Home Depot, Microsoft, Intel, Dell and so on.

It's true that companies go out of business for one reason or another; fraud in the case of Enron. So K-Mart went bankrupt. There are over nine thousand public companies out there. Guess what? Wal-Mart did very well, thank you. If you had put $10,000 into K-Mart 20 years ago and $10,000 in Wal-Mart, you would have basically lost the $10,000 on K-Mart but you would've made $790,000 on Wal-Mart. For every Enron or K-Mart out there, there are companies that do very well, like GE, Proctor & Gamble, Coca-Cola, Gilette or Johnson & Johnson.

In the long run, there is only one reason why stocks go up: Companies grow from small to large or go from doing poorly to doing well. Bottom line is if company do well, their stocks will too.

In time of prosperity our friends know us;
in time of adversity we know our friends.
-- Churton J. Collins --

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