Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you fundamental stock market investing tips. Each Investor Toolkit update gives you a specific tip and shows you how you can put it into practice right away.

Today’s tip: “The value of a company as an investment depends on its business, not on the stock price or number of shares outstanding.”

When a company splits its shares, it is simply cutting itself up into a different number of pieces, without changing its fundamental value. It simply wants its stock to trade in a price-per-share range that seems reasonable to investors.

• Mechanics of a split: If a stock’s price rises much beyond $50 a share in Canada (or $100 a share in the U.S.), some investors may shun it since it seems expensive. The company’s management may then declare a stock split of, say, two-for-one. This turns one “old” share into two “new” shares. If you owned 100 shares of a $60 stock, you now own 200 shares of a $30 stock. You don’t need to take any action.

  After a conventional stock split, good news often follows. Companies mainly split their shares when they want to draw attention to themselves — because they expect earnings to rise faster than normal, say. At such times, they may also raise their dividends. However, sometimes companies get overly optimistic. Their profits come in far below expectations, and they can’t keep paying the new, higher dividend. So a stock split can be good or bad for your stock market investing, depending on the details.

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• Splits in reverse: If the value of a stock collapses to pennies a share, investors may think it is headed for zero. To bring its share price back up to more respectable levels, the company may declare a reverse split: five, 10 or more “old” shares will then turn into one “new” share. This “reverse split” is also called a “share consolidation.” It’s what usually happens to penny mining companies that have spent all their money without finding any valuable mineral deposits.

  After a reverse split, stock prices often fall back down again. Some investors sell because the stock seems more expensive than it was, even though a given holding represents the same percentage ownership of the company. Others sell because they fear the company will raise money by selling new shares, and this will drive down its stock price.

  Remember, stock splits and consolidations are a minor stock market investing detail. Don’t let them distract you from more important matters, such as a company’s fundamental value and how well it suits your investment objectives.

Next Wednesday, July 7, 2010, Investor Toolkit will look at how much turnover you should have in your portfolio.

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