Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 192

the same. Then at payment date, the company issues sufficient number of shares and distributes them among the shareholders. Companies who choose to pay stock dividends rather than cash save money while still rewarding their shareholders to some degree. Most investors, however, prefer cash dividends, so many companies have decided to forego stock dividend distribution in favor of stock splits, which are a more popular form of stock dividend.We will cover splits next.

While cash dividends have been a part of stock investing for many years, the trend indicates that they may eventually be eliminated. A recent example is AT&T, which on December 2000 cut its dividends from 22 cents to 3.75 cents per share. Another example is Lucent, which on July 2001 discontinued payment of cash dividends on its common shares altogether. Many companies instead may decide to use their earnings to buy back some of their common shares on the market. By soaking up some of their shares, they reduce the number of the shares outstanding in the market (reducing supply) thereby giving a lift to their stock prices and keeping their shareholders happy. Regardless, most people now buy stocks not because of dividends, but because of the hope in stock price appreciation. Some may view this as a misplaced priority; others would view it simply as a shift in what investing in stocks has come to mean.

Stock Splits And Reverse Splits

Stock splits, especially in recent times, have resulted in stock price appreciations. The question is, why would a stock split contribute to stock price appreciation? Before we delve into the answer, let's take a look at what stock splits are and why stocks split. A stock split literally means to split the existing shares to end up with more shares while maintaining the same market value as prior to the split. It is in a sense a popular form of stock dividend. This is just like taking a $20 bill and


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    Bonds Futures Stocks Options
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