I often wonder if stock splits are really that good for an investor. I have posed this question to many experts with varying opinions. Some feel that a stock split encourages growth and shows the health of a particular company, while others say it has little to no effect at all. Both parties are correct but I tend to believe a split has many benefits which I will explain.

A stock split is where a company will keep the market value of the stock the same but give you more stocks or less stocks in a reverse split. For example if you have 10 stocks in a company and it splits 2:1 you now have 20 stocks but where the original stock price may have been $10 x 10 stocks you now have $5 x 20 stocks. It is exactly the same thing. Think of it like going to the bank and exchanging a $100 bill for two $50 bills. You still have $100 but now you have two $50 dollar bills. So why do I suggest that a stock split is a good for an investor?

I can tell you as a small investor working with limited funds that there is a psychological and real advantage that comes from a split. A stock that is valued at $200 is difficult for me to purchase, so I tend to look for stocks that will perform as well at a lower price. I know that $200 stock is good, I can see why the company is good investment but because of the price I am scared away because I do not want to have too much stock in one company or market sector. But if a $200 stock splits 4:1 it is now a $50 stock and I can afford to invest in it. I understand that the $50 stock does not hold the same value as the 1 that split into 4 but I can now afford to buy into the company without investing too much money into one particular company or sector and that is worth a lot to me.

That is why I suggest that there is a value to splitting a stock as it will attract a broader investor base.

What are your thoughts?