Understanding Stock Splits: When and Why Matters

Stock splits are a common yet often misunderstood financial event. A split occurs when a company decides to reduce its stock price while increasing the number of outstanding shares. This can be due to a variety of reasons and can significantly impact how a stock's price and performance are tracked over time. In this article, we'll explore what a stock being ‘adjusted for splits’ means, how splits affect stock charts, and why understanding these concepts is crucial for investors.

What is a Stock Split?

A stock split is a corporate action in which a company decides to increase the number of its outstanding shares while proportionally reducing the price per share. This can be done to make the stock more accessible to a broader range of investors by lowering its price per share.

The most common type of stock split is a "two-for-one" split, where each shareholder gets an additional share for each share they already own, with the price per share thereby halving. For example, if a stock was trading at $100 per share and underwent a 2-for-1 split, the new share price would be $50 per share, and the number of shares would double.

Why Do Companies Split Their Stocks?

There are several reasons why a company might choose to split its stock:

Market Accessibility: Lowering the stock price can make it more accessible to a wider range of retail investors who might have been priced out of the market with higher-priced stocks. Perceived Value: Splitting the stock can be seen as a positive signal to the market, suggesting that the company believes its stock is valued too highly and wants to make it more attractive. Shareholder Benefits: Splitting the stock can help ensure that existing shareholders do not lose their proportional ownership share of the company.

The Importance of Split-Adjusted Stock Charts

When analyzing a stock's performance, it's crucial to understand whether the stock chart has been adjusted for splits. Split-adjusted stock charts correct for the changes in stock price that occur due to splits, showing a consistent price history. This allows investors to compare the stock's performance before and after splits and make more informed decisions.

For example, consider the stock TQQQ which went public on February 11, 2010, with an initial share price of about $83. Since then, TQQQ has undergone six splits, resulting in an accumulated 96-for-one split ratio. The chart below shows the price series adjusted to reflect the effects of these splits, revealing a more consistent price progression.

As you can see, this chart shows TQQQ at roughly $0.87/share. Despite the split adjustments, the total number of shares you hold would be 96 times the number you owned initially. Therefore, the net effect is the accumulation of profits, as you would have 96 shares for each one you originally owned. This split-adjusted chart is the most accurate way to track the stock's performance over time.

Comparison of Split-Adjusted and Not-Split-Adjusted Charts

Not-split-adjusted charts can be messy and less useful for understanding a stock's true performance. Let's consider the not-split-adjusted chart of TQQQ. Here, the chart still shows the initial share price of $83, but the subsequent splits are not reflected in the price changes.

In this case, the chart makes less practical sense, as the price changes are not consistent with the actual split adjustments. This can lead to misunderstandings about the stock's historical performance.

The Benefits of a Reliable Charting Tool

To effectively track and analyze stock splits and their impact, having a reliable charting tool is essential. My charting software, TC2000, has been a valuable asset since the mid-to-late 1980s. It provides invaluable insights into stock performance, including the effects of splits. At around $20 per month, the cost of this tool is minimal compared to the potential gains it can provide.

As an active trader and investor, I've found that using a charting tool like TC2000 is crucial for making informed investment decisions. It allows me to scan charts for various characteristics, identify profitable opportunities, and maximize profits. Without access to such tools, investors are likely missing out on significant potential gains.

In conclusion, understanding stock splits and the importance of split-adjusted charts can greatly enhance your ability to make accurate and informed investment decisions. Whether you're a seasoned investor or just starting, paying attention to these details can help you navigate the stock market more effectively.

Keywords: stock splits, adjusted for splits, stock charts