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Stock Split Advantage
A company usually declares a stock split when the price of its stocks gets too
high that is no longer attractive to investors. When the price of stocks gets too
expensive, it tends to project an image that it has already reached its peak and
make people think that the stocks are no longer a good investment. Also, when
the price of stocks gets too expensive, it tends to discourage investors from
buying them. Hence, a company will declare a stock split.
So, how does a stock split work? For example, if you have 30 stocks at $20 each
and a stock split is declared, then you will end up with 60 stocks at $10 each. It

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is a fair division. The number of stocks will increase after the split, but their
price will also decrease. It is worth noting that a stock split is not limited to
dividing a stock into two. A stock split may divide a stock into three or even
more splits.
The way to use this strategy is to examine a company that has just declared a
stock split. If the stock split was legitimately done due to a flourishing business,
then the stocks of that company may be a good investment. Of course, you
should also find out as much as you can about a company and make your
analysis. Relying on a stock split alone is not a good idea.
You should be aware of the reverse split. The reverse split is also like a stock
split but in reverse. Unlike a stock split, a reverse split is a bad sign. Remember
to stay away from companies that use a reverse split.
Here is how the reverse split works: if you have 10 shares of stock at $10 each in
Company X and a reverse split is done, then you will end up with 5 shares at $20
each. As you can see, the price of the stocks has increased significantly. A
company may use a reverse split to entice investors to make an investment. But,
as you can notice, it is actually a fraudulent move. The increase in the price of
stocks is not caused by any progress or development in business but merely by
mere manipulation. Of course, a company who exercises a reverse split may be
successful in the future. However, such act is a sign that the company is already
struggling at the present time. Although success is still possible, investing in a
company that uses a reverse split is too risky. After all, you can find other
companies to invest in.