What is a 3 for 2 Stock Split

• A 3 for 2 stock split means that investors will receive three shares of stock for every two shares they currently own. Shares are given to current holders of the stock not at the time of the announcement but to holders at the ex-dividend date, which is a date in the future. The date of record is the date that an investor can buy a stock and still be the holder on the ex-dividend date. The actual date for delivering the new shares is usually weeks past the ex-dividend date. This is called the date of payment.
  
  

3 for 2 Stock Splits Do Not Increase Wealth

• 3 for 2 stock splits create 50 percent more shares outstanding and thus for each investor a gain of 50 percent in the number of shares held. It does not increase wealth, however unless the stock price rises after the split. Stock splits do not reflect any real cash flow change, except on a per-share basis. Splits do not affect price-to-earning ratios or other asset or debt ratios. Absolute levels of debt and cash are the same. In order to issue a 3 for 2 stock split or any other stock split the company must have pre-authorized enough shares to distribute to share holders. It is through company authorizations at board meetings that such actions can be taken.
  
  

Computation of Stock Splits

• Any stock split can be calculated by a simple formula. In the case of a 3 for 2 split divide the ratio of new shares (3) by the number of old shares (2). The result is 3 divided by 2 or 1.5. Multiply this ratio by the actual number of shares held. Thus, if you own 50 shares of stock pre-split you would own 1.5 times 50 shares or 75 shares. This formula also works for reverse stock splits where companies reduce, rather than increase, the number of shares outstanding. Reverse stock splits are used by companies usually under financial stress in order to create a minimum stock price required for trading on an exchange.
  
  

Tax Effects of a 3 for 2 Split

• It is possible to gain a slight tax advantage after a stock split. Shares equal to the sum of all purchases can be used at their original cost for tax purposes. Since split shares decline in value after the split the stock can gain 50 percent in value and still not pay tax. Tax is only due when the split stock is sold or the value of the gain exceeds 50 percent.
  
  

Profiting from a 3 for 2 Stock Split

• When a stock split is announced there is usually a rise in the price of the stock. This is especially true if the split is accompanied by a dividend increase. However, many traders use a variety of trading strategies involving options, to buy stock leading up to the time of the split and selling the stock on the ex-dividend date. This occurs because many investors see stock splits as a management sign that better times are ahead for the company. Rather than use cash for dividend increases or special payouts stock is created cash free to the company. This period of good feeling can result in substantial increases in stock price whether it is proved to be true or not.