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Stock splits are when a company changes the number of shares it has outstanding, and their prices are adjusted accordingly.

Here's an explanation we ran in our weekly newspaper feature (for more info on how to get it in your local paper: http://www.fool.com/Specials/1999/sp990409Newsprint.htm)

Stock Splits

Wondering whether to buy a stock before or after a split is like asking, "Should I eat this peanut-butter-and-jelly sandwich before or after Mom cuts it in half?

Stocks don't become more inexpensive when they split. True, you get more shares. But each is worth less. Imagine you own 100 shares of Sisyphus Transport Corp. (ticker: UPDWN). They're trading at $60 each and total $6,000. When Sisyphus splits 2-for-1, you'll own 200 shares, worth about $30 each. Total value: (drum roll, please) $6,000. Yawn.

Some people drool over stocks about to split, thinking the price will surge. Stock prices sometimes do pop a little on news of splits. But these are artificial moves, sustainable only if the businesses grow to justify them. The real reason to smile at a split announcement is because it signals that management is bullish. They're not likely to split their stock if they expect the price to go down.

Splits come in many varieties, such as 3-for-2 or 4-for-1. There's even a "reverse split," when you end up with fewer shares, with each worth more. Reverse splits are usually employed by companies in trouble, to avoid looking like the penny stocks they are. If a stock is trading at a red-flag-raising $2 per share and it does a reverse 1-for-10 split, the price will rise to $20 and those who held 100 shares will then own 10.

Companies often split their stock so that the price will remain psychologically appealing. Sometimes, not splitting would mean that few people could afford even a single share. If Microsoft hadn't split seven times in the last decade, each share would be worth more than $6,500.

With stocks, just as with any purchase, examine what you're getting for the price. Study the company and compare the stock price to other numbers, such as earnings. A low price might be inviting, but a $200 stock can be much more of a bargain than a $20 one. If your funds are limited, you can just buy fewer shares.

It's always fun to suddenly own more shares, but splits are like getting change for a dollar. They're not cause for celebration.
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