What Stock and Mutual Fund Splits Mean

by Alan Lavine and Gail Liberman

When a company announces a stock split, it's a good sign. You might get two shares for every share you own because the outlook for the company is good. A lower stock price makes the stock more affordable to investors.

For example, Cisco Systems trades at around $50 a share. Without the nine stock splits it had over the past nine years, the stock would be trading at $14,000, says Ramy Shaalan, analyst with Wiesenberger, Rockville, Md.

"A stock split implies a company is optimistic about its prospects for growth," Shaalan says. "They make room for the stock to rise without reaching astronomical price levels."

A large number of investors will buy the stock after it splits. As a result, the shares price may move higher. You can get a list of stocks that may split from your stockbroker. Web sites to check: www.biz.yahoo.com and www.investhelp.com.

What about a mutual fund that splits its net asset value, which is the same as the share price? About 150 funds have lowered share prices in the past five years.

Shaalan says, however, that a fund split doesn't have any direct benefits to the investors. The price of a mutual fund dropping in half and doubling the number of shares owned in the fund does not create buying opportunities. The reason: Mutual funds allow for fractional ownership.

Investors can buy into a fund based on the minimum required investment. So the share price of the fund doesn't matter. As for the fund, a split will not trigger any run up in the fund's shares because the price is only determined by the value of the underlying securities.

Shaalan says there are a couple of reasons why funds may lower the price of their shares. They want the share price to be in line with similar funds. Or they do it to hype the fund and get publicity.

"Some fund companies may try to capitalize on investors' reactions to stock spits," Shaalan says. "But a fund split has nothing to do with a common stock split, except for the buzz that comes with the word."

So where are you likely to find mutual funds that own a lot of stocks that are going to split? Shaalan says to look at growth stock funds. They own a lot of fast growing companies. If earnings are growing above expectations, the stocks owned by the fund will rise. So there is a chance the stock owned buy the fund will split.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.