The Stock Market Game Week in Review: Nov. 12-16

Find out what stock splits are and how they work.
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Once again, this week's headlines were marred by bad news both on and off Wall Street, from disappointing news about Barry Bonds to the cyclone slamming Bangladesh. The markets haven't fared much better.

Despite

Cisco

(CSCO) - Get Report

recently announcing that it would expand its share buyback program by $10 billion, the markets were overshadowed by news from two other heavy hitters:

FedEx

(FDX) - Get Report

and

Starbucks

(SBUX) - Get Report

.

FedEx announced it's cutting its earnings outlook, citing higher fuel costs and a strained U.S. freight market. Starbucks reported similar bad news late Thursday when it stated that, for the first quarter in its history, the number of visits to U.S. stores fell, adding to worries about consumer spending. The coffee store chain also forecast that its 2008 earnings will fall below many Wall Street estimates.

Rather than focus on the negative, this week's topic will be on something rather neutral: stock splits.

First off, what are they? A stock split refers to a corporate action that increases (or decreases) the number of shares in a public company.

A 2-for-1 stock split, for example, doubles the number of outstanding shares and divides the price by two. If you own 100 shares of a stock selling at $50 a share, for a total value of $5,000, and the company's directors authorize a 2-for-1 split, you would own 200 shares priced at $25, with the same total value of $5,000.

While 2-for-1 splits are the most common, stocks can also be split 3 for 1, 10 for 1 or in any other combination. In addition, a company can reverse the process and consolidate shares to reduce their number by authorizing a reverse stock split

Four companies that have recently announced stock splits include farm equipment maker

Deere

(DE) - Get Report

, automobile power-train-products maker

BorgWarner

(BWA) - Get Report

, oil and gas producer

XTO Energy

(XTO)

and

Rofin-Sinar

(RSTI)

, a leading maker of industrial lasers.

So what is the purpose of a stock split? It's basically an accounting procedure. Instead of a $20 bill in your wallet, you now have two $10 bills.

But if a stock split simply rearranges the numbers, why do companies do them? The usual reasons include making the stock appear cheaper than it really is (to encourage more buyers), increasing liquidity, meeting stock exchange listing requirements and expressing a bullish management attitude.

For more information on stock splits, be sure to take a look at the

Stock Talk

issue "Anna and the Banana." The edition is accessible in the

Teacher Support Center

under the Publications section.

Have a great weekend and a wonderful Thanksgiving!

This article was written by a staff member of The Stock Market Game.