Why Do Stocks Split?

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Stocks split when the board of directors of a company decide to split the stock to dilute the shares. Find out why stocks are split to make the shares more negotiable with help from a licensed financial planner in this free video on the stock market and investing.

Part of the Video Series: Stock Market
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Video Transcript

My name is Bill Rae. I'm with Alumni Financial Services. I've been in the business and finance world for well over 20 years and your question is why do stocks split? That's an excellent question. Well first of all, let me tell you this. We're not here to give stock advice or to solicit sale of stocks. With that being said, why stocks split, well the board of directors comes up with that decision and they're the ones that decide based on their knowledge of the company as to what to do with the stock whether to repurchase it, bring it back in or to split the stock if you will. When you split the stock, normally the reason for splitting a stock is to dilute the shares if you will. What they're trying to get at is they're trying to make their shares more negotiable. If a stock becomes too high priced, maybe it's not as easy to get people to buy in and therefore it's a little harder on them to raise capital. So by splitting the stock, they're diluting those stocks out if you will and allowing it to be more liquid. That's not the complete reason, but a fairly simple explanation of why companies will do a split if you will. And splits can happen 2 to 1, 3 to 1, 4 to 1, 5 to 1, whatever they determine. But generally the reason is is to dilute the shares out there to allow more flexibility. Hope that answers your question. In all things we recommend if you're going into an agreement or contract or buying, make sure you understand the contract or the agreement, make sure you understand what's required of you, make sure you understand the cost, how and when you can get your money back and a reasonable return on your money. And as always we advise seek licensed professional advice. My name is Bill Rae, I'm with Alumni Financial Services and as always we're here to help you build wealth.

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