Stock split gives you more shares

On Money

February 04, 1996|By Susan Bondy | Susan Bondy,Creators Syndicate

A stock I have owned for more than 15 years has just announced a 2-for-1 split. This split will take place in five weeks. Should I sell before the split or hold on?

A stock split is simply an accounting procedure. Aside from bookkeeping adjustments, it has no tax consequences and the fundamentals of the company are unaffected.

If you own 100 shares of stock selling at $90 each, a 2-for-1 split will leave you with 200 shares at a price of $45 each. A 3-for-1 split would produce 300 shares at $30. After a 3-for-2 split, you would own 150 shares worth $60 each. The total dollar value, $9,000, remains the same.

Because most investors buy stocks in round lots (lots of at least 100 shares), splitting allows them to buy shares with a smaller investment of dollars.

Technically, no one benefits and no one gets hurt from a stock split. But there are psychological and technical reasons people may look favorably on stock splits:

* The corporate purpose of a split is to adjust the price downward to attract more investors to the lower, more affordable price. If the new, lower price does indeed attract more interest, the additional buying pressure -- the demand -- may push up the price.

* Splits may be accompanied by dividend increases. Anticipating an increased dividend, investors may buy additional shares.

* Announcement of a stock split calls attention to the fact that the price of this stock has reached a high or even a record level, connoting investor confidence in the company.

Stock splits often lead to immediate price increases. However, if the company's earnings or dividends do not continue to grow, this increase will probably dissipate.

You should not let a split (or the lack thereof) affect your decision to sell the stock or to hold it. If you think the company has a potential to grow, I would strongly recommend using a stop order to safeguard the profits you have accumulated.

I recently cashed some Series E bonds and received $725. The original purchase price was $350. The interest for taxes was $375. Do I have to pay $375 in taxes on only $725, or is that to be deducted? I am confused.

Yes, you are confused, but the news is better than you think. Only the accrued interest of $375 is subject to taxes. If you are in the 28 percent tax bracket, the tax due is $105 (28 percent of $375). And if you are in the 15 percent tax bracket, your tax liability will be $56.25 (15 percent of $375).

For those readers who need income but don't want to pay the accrued taxes on Series E or Series EE bonds, you can convert them to Series HH bonds. Unlike Series E or EE bonds, Series HH bonds pay semi-annual interest while continuing to defer taxes on accrued E or EE bond interest.

Susan Bondy welcomes readers' questions, but the volume of mail prevents her from answering each letter personally. Write to Susan in care of this newspaper. All letters will be treated confidentially.

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