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 194

up the price of the stock as soon as the split is declared.While there is no rational reason why split shares should make huge jumps, some of them do.Many of them reach their pre-split price in a short run and set the stage for yet another split. Stocks such as Dell,Microsoft, and Cisco, which have split multiple times in the past few years, have made their investors very rich in a short run.

After a stock split, almost all financial data on the stock are adjusted to post-split basis so continuity is maintained. Otherwise the data will be discontinuous and very hard to decipher. For example, after a 2 for 1 stock split, the pre-split stock price data is cut in half to maintain correct relationship with the post-split stock price. The term "adjustment factor" is used to indicate the split adjustment. Thus, a stock splitting 2 for 1 would have an adjustment factor of 2 to 1. If this stock splits 2 for 1 again down the line, its adjustment factor as compared to the original price would be 4 to 1, and so on. There are no rules on when, how, or at what price a stock should split. Some stocks split at $30 a share while others may split at $300 a share. And many may never split. Should you invest in a stock that is about to split? My opinion is don't base your investment decisions on splits. Besides, if you are attempting to take advantage of the price jump when the split is declared, you've already missed the ride. Also remember that a stock may not even move up in price, or even worse may move down, when a split is declared if investors show no excitement over the split. It all depends on the market mood. Good luck predicting it.

Microsoft (MSFT), with an adjustment factor of 144 to 1 from 1986 to 2001, is a good example of a stock that has split multiple times in the past few years and has had a consistent rise. This means that for each share an investor held back in 1986, she would have 144 shares today. If the stock price in 1986 was $30 per share and it is $60 per share today, our investor would have multiplied her holdings in Microsoft 288


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