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The stock market isn't for the faint of heart. Sure, you can make a mountain of money, but you can also lose it in the blink of an Enron. Sometimes, usually after significant long-term gains, a stock "splits." We consulted our friends at Yahoo! Finance to learn why. A stock split occurs "when a firm issues new shares of stock and in turn lowers the current market price of its stock to a level that is proportionate to pre-split prices." Say for example, you own 10 shares of Joe's Tomato Company, and they're trading at $50 per share. A split would mean you'd double the amount of shares you own, but the price of each share would be cut in half.
So you'd end up with 20 shares adjusted to $25. So if it's all a wash, what's the point? As the Motley Fool explains, companies often believe the market will view a stock split as good news. It's a company's way of saying, "We believe in this stock and you should buy it." Of course, sometimes that confidence is unfounded, but hey, those are the breaks. Another, more obvious, benefit to a stock split is that more people can afford to buy shares. Lower prices tend to give investors the illusion they're "getting a bargain." But remember -- $200 for a great stock is still a better deal than $2 for a lousy one.
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