Stock splits are easy to understand, which may be the reason why they appeal to a broad base of individual investors. And owning a stock that splits can be very profitable. In certain periods, actually, heavy stock split activity in the market preceded periods of relatively poor price performance. In a stock split, a company exchanges one share for a larger number of shares, without raising the overall market value of its stock. But the total dollar value of an investor's holdings doesn't change.
Companies advertise splits as a way to make expensive stocks more affordable for all investors.
In fact, splits frequently cause stock prices to zoom higher immediately after they're announced. Studies do show that a stock price usually rises from the time a split is announced until it actually takes place. His findings have been borne out in the past few weeks as some well-known companies announced splits that sent their already high stock prices even higher. Drug companies Amgen and Pfizer joined the act, and McDonald's, McGraw-Hill and Alcoa also announced splits. Stock splits can be positive news.