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Author: TMFLost Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 265  
Subject: Re: stock splits are a bad thing - according to Date: 2/13/2000 12:43 AM
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jax4pres wrote:
I am suggesting that this book implies that stock splits are undesireable, b/c a company all of a sudden has MORE shares.

Can someone please clarify?


First of all, when there is a stock split, the following annual report will adjust the number of shares for the previous year to take into account the change, e.g. if there were 1 million shares, the next annual report will say that there were 2 million. Thus, if you use the data from the latest annual report, rather than the information from the previous annual report, the anomaly will disappear.

Secondly, I think that this section is mainly concerned with dilution of the shareholders' positions. If a company increases in value by 10%, but there are 10% more shares, the increase in value for the shareholders is zero.

The way to look at it is that we want the nominal value of the company to be decreasing. The nominal value is not dependent upon the share price. When shares are issued, they are given a nominal value, or face value, say 25 cents. If the company has 1 million shares with face value 25 cents, this gives the company a nominal value of $250,000. This will stay constant unless more shares are issued or some are withdrawn (bough back and cancelled) by the company. The market value for the shares can go up or down without affecting the face value- face value is a book-keeping concept, the share price is a supply/demand concept.

Now, let's say that they do a 2 for 1 split. You now have twice the shares, but the nominal value has halved, e.g. the face value is now 12.5 cents, there are 2 million shares, and the nominal value of the company is $250,000. No change.

So, share splits do not change the nominal value.

If the company cancels shares, the nominal value of the company increases, so your x shares are worth a greater percentage of the company, which should be a good thing. If the company sells more shares, or gives options not covered by buy-backs, the nominal value increases, so your portion of the company goes down, a bad thing. By looking at the figures for the number of shares (adjusted for splits) you will see whether the cancelled shares outweigh the new issues.

Hope this makes sense,

Lost
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