Stock Splits and Reverse Stock Splits

June 26, 2009

The reason why companies do stock splits can be explained by investor psychology. A stock with an excessively high price-per-share will cause the investors to feel that it is out of their reach. To make the shares more affordable to smaller investors, the company will opt for a stock split in order to reduce the price of the stocks. Small investors can actually buy a smaller number of pre-split shares for the same price but they sometimes opt to buy split shares due to the appeal of buying stocks for much lower prices.

There are several reasons why companies do reverse stock splits. These may be due to an attempt to stave off possible de-listment on the stock exchange, an effort to push out minority stockholders from the company, an attempt to shed off possible consideration as a poor investment, or an effort to push through ideas of going private.

A low price per share can result to greater liquidity since stocks with lower prices are easier to sell. This is true especially for the stocks which are priced in hundreds of dollars because small investors consider them to be out of their budget. The high bid/ask spread, which is the difference between the buying and selling prices, can also put off bigger investors.

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