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"Splits are used to increase the availability of shares on the market." I am unsure about this statement because you can increase the availability of shares through third-party funds like with Berkshire shares. Now, I am trying to understand what the splits are really used for but with ETFs. Personally, I feel splits are just annoyances to track the valuation of equity. Like did the EEM drop because of the split or because of the crash here?

Example with Odd Split, iShares Emerging fund ETF split just before the 2008 crash

Example with Odd Split, iShares Emerging fund ETF split just before the 2008 crash

iShares Emerging market fund here splitted just before the 2008 crash, I am wondering why because usually such actions are done to increase the availability of shares on the markets -- particularly to low-income people who are unable to buy very expensive shares.

Helper questions

  1. What is the real purpose of splits with ETFs? To me, it is looks like accounting magic to complicate things.
  2. How are splits between stocks and ETFs different?
  3. How to re-valuate assets after splits?
  4. How does splits affect valuation numbers? Surely, it affects the equity per share but other?
  5. Is it good idea to buy before or after or after very long time after a split or not at all?
  6. Are splits common during crash or just before crash? If so why?
  7. Which parties gain with this kind of splits?
  8. Are splits speculation by the firm/corp to attract poor people to trade? For institutions, it is no problem whether the price is 3 times higher or not.
  9. Are splits to increase gambling with the equity?
  10. Even with liquidity/psychological advantage, why would firms/corps want to stain their name with speculators?
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    This question should really be broken up into different questions. – Michael Pryor Jul 5 '11 at 21:13
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"Splits are used to increase the availability of shares on the market" at an affordable price.

For example, if a share reaches a high price of, say, $100, I can now buy only in multiples of $100, $200 etc. If I have $150, I can only put $100 in that stock and the remaining $50 I need to put elsewhere. If the share were to split 10-for-1, i.e. 10 shares at $10 each, I can now buy $150 worth of shares, so the trading volume increases, hence its more liquid, hence the price is slightly more than if the shares had not split.

Also, when one sees a large number, one may doubt how much the share price could increase further; this is purely psychological, and the performance of a company is not dependent on it.

  1. ETF Split: Same purpose as stocks. If the index / stocks its tracking becomes large, it makes more sense to split. It is a psychological advantage.
  2. Difference between Stock split & ETF split: Fundamentally not much. Pretty much the same concept.
  3. Re-value after splits: Take the historical value as if the split has happened before. This would involve some jugglery.
  4. The valuations in percentage terms are same.
  5. Normally splits typically increase the price as the stock becomes more liquid. So its advisable to buy just before the news of split is known. However most of the times the news is leaked and the price increases much before the split is announced.
  6. Splits are common when the markets are high as this would be the time typically the price of the stock is quite high and hence the need for split.
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    Dheer: is this "Physiological advantage" statistically significant? Sorry I am skeptic but to me it sounds like children game or work of poor firms/comps. Did you look at the picture? With about 60USD and split 3:1, should the price of the fund drop to 20USD? Why did it drop just that little then even with the crash? Why did the historical average stayed about the same, not dropping by 3 times? Why would any firm want speculators to valuate their prices? I cannot see no reason to attract small-pocket people, speculation attracting at the best. – user1770 Jul 4 '11 at 13:11
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    -1 sorry but you miss some important considerations such as "speculation" and "gambling" and miss the historical view of the issue. During the old days, it may have been so that you buy only in multiples but currently I cannot see a problem to put 777 offer to BRK, heard the word "online brokeage"? I think splits are just Bxllshxt, more limited discussion here, and I personally try to avoid companies exercising such magic. Hopefully, my stance will attract proper opposition with scientifically-validated results! – user1770 Jul 4 '11 at 19:42
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    I am quite circumspect about point 7. How does everybody get more money ? – DumbCoder Jul 5 '11 at 7:43
  • @DumbCoder: What i meant was if a stock/ETF is traded more it means it more liquid and hence the prices are slightly higher than what it should be. – Dheer Jul 5 '11 at 14:45
  • @Dheer: are you sure about that? How do you know that there was a liquidity problem? What about if lower prices attract more speculation and transaction costs will leave less for people to invest in aggregate, meaning less money to invest. Can you provide proper research paper about the issue you are considering? – user1770 Jul 7 '11 at 9:50
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Your 'situation' above is contrived. It ends up presuming that the folks who made the decision to split would have been able to foresee the post split events coming. You are looking at something in hindsight and saying it doesn't make sense, but the decision to split far preceded the actual date of the split, and had no way to predict what would happen after the split.

To be fair in terms of a 'does it make sense? or 'wondering why' you need to look at the chart up to the day when the decision to split was made, and not include data after that point. If you want to ask 'why still go through with the split' then look perhaps up to the day of the split, and perhaps consider what market action might have happened between the date of the decision to split and the date it was executed.

enter image description here

Now we are looking at something that has increased nearly 400% in price over a 5 year period, and appears to have a fairly stable price, especially if you consider that the start of the decision to split would typically have preceded the actual split by several months. That is the information available and the situation at the time prior to the split.

To consider anything that follows, is to presume that these folks had a crystal ball that would allow them to see what was coming. (and frankly if I had such, I'd be far more concerned with finding a way to short the market, than of I should still split my stock)

To really do a study of this you would need to look at more than a single stock, especially one that had a sharp decline in the latter portion of 2008 when pretty much everything tumbled and it would be difficult to prove any causality. In this case however, if we ignore for the moment that it is an index etf, and pretend it was just a normal stock, we can still attempt an answer by looking at the performance of the issue relative to an appropriate index of some sort. If we do that in this case, starting with the split and looking at the next two months or so, it looks like this. enter image description here

Which pretty much shows no deviation from the appropriate market as a whole, which would indicate the split had nothing to do with the price activity post split.

Now in the case of this particular issue, asking 'did the price go down because of the split' is really a pretty stupid question. In order to answer yes we have to presume that the splitting of an ETF on the US market, affected an entire foreign market index worth of stocks, which would be the ultimate case of the tail wagging the dog. That's because the item you selected is a ETF that represents an INDEX, and it's value is derived from all the stocks IN that index, and in this case we are talking about an Emerging Markets index, so the disconnection between the stocks in that index and the split of the ETF could not be more remote. I can't really conceive that the investors in a bunch of foreign markets were all monitoring the activities of an index etf on the american market, and reacting to it splitting.

I'm pretty much ignoring your sub-questions because firstly they were largely addressed by @Dheer, and secondly they don't make much sense at all when applied to an index ETF for which there is no way for the split to affect the price, and no incentive to 'increase gambling' or other ulterior motives etc

  • Chuck van der Linden: of course, it is artifical example! Look here, AAPL did a split 2005, its price stayed about the same but still the amount doubled, it should imply that the market cap should double as well (price per share * amount of shares = market cap, by def) but if you look at the chart the market cap is about the same (sounds intuititive but conflicting the latter). Google Finance acts similarly but I am now confused what the price is they report on the site? It is not anymore share price but what is it then? – user1770 Jul 7 '11 at 10:23
  • Chuck van der Linden: VWO did its SPLIT about the same time as EEM! With real stocks, such activity would probably attract SEC but here it is different story or is it? Why did they split about the same time (just slightly differently, 2:1 and 3:1)? How are the splits handled technically? I still cannot understand why n:x split would not decrease the price by n/x -factor immediately after the split? – user1770 Jul 7 '11 at 10:31
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    I think you are confused with how historical data is presented when splits are involved. In order to prevent weird jumps in the charts, and allow you to see relative value of a current single share over time, historical stock prices are almost always displayed on an adjusted basis. This is especially true for a security that has split multiple times. – Chuck van der Linden Jul 7 '11 at 18:58
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    BTW do consider that with a Mutual Fund, you buy and sell in dollar amounts, not on a 'per share' basis. That makes it really easy to do something like buy $250 a month worth of a fund. ETF's trade on a share basis, and the higher the share price the harder it is to do a transaction of a given approximate value. So in order to behave more like an actual fund, there is a pretty big incentive for ETF managers to keep their share prices low, perhaps moreso than with a stock. – Chuck van der Linden Jul 7 '11 at 19:35
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    The prices are adjusted just how you would expect, which is as if the stock had been split all along. e.g. a stock that was $60 on 6/30, and split 2for1 on 7/1 would be shown as having been $30 on that date after the split. Splits are always announced and I'm sure you'd find them noted in most major financial publications. There are also services that will send out announcements of splits (you can find them via google, buyer beware as I think most of them will try to sell you something), and you might be able to with a bit of trail and error figure out good criteria for a google alert. – Chuck van der Linden Jul 7 '11 at 20:10

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