Stocks: Splits

Would you rather have six of one, or a half dozen of the other? The same thing, right? But in the investing world, stock splits work a little differently.

When a company's stock price gets very high, some investors may shy away from purchasing it. In an effort to lure investors with a lower price tag, companies often split their stock in two or more equal parts. For example, if XYZ Co.'s stock climbs to $120, the company may announce a 3-for-1 stock split, meaning shareholders would get three $40 shares for every $120 share they hold. The underlying value remains the same.

Since the bursting of the tech stock bubble many companies have chosen to do reverse stock splits -- splitting a stock 1-to-5, for example -- to raise the stock price to a level that might be more enticing to institutional investors; the most prominent recent example being JDS Uniphase.

In essence, the "six of one, half dozen of the other" model holds true. But investor sentiment may make it different. Some investors may like to purchase shares in 50-share or 100-share lots, and a big price tag for one stock may keep them away.

Many investors monitor stock-split announcements, and buy shares on an announcement, hoping to see a pop in the price once the split takes effect.