Ask Colin

What is the likely impact of a share splits and consolidations?

In every market there is a usual price range for shares. It is only loose, but for example in Australia most companies sell for between $1 and $10. Prices under $1 and lower tend to indicate poorly performing or speculative companies. Prices over $10 tend to indicate very large solid companies.

Accordingly, companies will split their shares when they get too expensive, to do two things: 1. Reduce their price so they look cheaper. 2. Increase the number of shares so that trading becomes more liquid. Both of these things have a tendency to raise the real price, however, such changes on their own won't fool the market - the earings still have to be there and continue to grow.

When a stock is very illiquid, its price can move very sharply. When its shares are split, some shareholders may sell some of the holding, but not all and that may increase liquidity. That would have a depressing effect.

So, as always in these things it all depends on the situation.

A consolidation is the reverse of a share split. This is an attempt to increase the price of cheap shares back into the range of investment grade shares. It is hoped this also will increase the price if investors look on the company more favourably as a result.

You are obviously looking for a way to make profits out of it. The accepted way is to buy into splits and consolidations. However, I think it only works in strong bull markets and where it is a very good company anyway. In other words, it is a marginal factor in the picture and you should concentrate on the more important factors that drive share prices.


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