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 195

times.We arrived at this figure by considering that the current $60 stock value is 2 times the 1986 value, which was $30, and at the same time there is a 144 to 1 adjustment factor due to all the splits. For example, a $5,000 investment in Microsoft back in 1986 would have yielded $1,440,000 today.

There is also such a thing as a reverse stock split. In reverse splits two or more shares of the stock are combined to make a single share while maintaining the overall market value. This is exactly the reverse of stock splits. If splits are normally good for stock prices, then reverse stock splits should drag the stock price down. Right? Not necessarily. At least companies engaging in reverse stock splits hope that such move would lift their stock prices. Remember our coverage of penny stocks and how unsavory they are to many investors? A company with a low stock price may want to carry out a reverse split to hike up its stock to a more presentable price. Reverse stock splits also have the effect of reducing the number of outstanding shares of the stock, thereby increasing its EPS (Earnings Per Share) value. (We will discuss EPS later. For now note that a high EPS reflects good earnings for the company.) A more suitable per share price, fewer outstanding shares, and a higher EPS value may be just what the doctor ordered for the company's stock to gain more demand and rise in price. But then again, never forget the rule of uncertainty when it comes to the stock market. If investors are in a bad mood, you may not see the stock price rise after all. Or you may see it rise a few weeks later as investors gain confidence in the stock. As an example, if you initially own 1,000 shares of a stock at $5 per share and a 1 for 2 reverse split is executed, you would end up with 500 shares of the stock valued at $10 per share: half the number of shares but the same market value as before.


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