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Stock splits get lots of attention. However, the split is merely a formality. The real questions are: What are the circumstances causing the split? What are the new developments as a result of the split?

A stock split, or forward split, occurs when a company increases the total number of its outstanding shares, usually doubling by way of a 2:1 split, without altering the overall valuation of the company.

For example, you own 100 shares at $6 per share for a total value of $600 in Company A. This company decides to split it’s stock 2:1. This means you will receive 2 shares for every 1 that you hold at the time of the split. The result would be 200 shares at $3 per share for a total, unchanged value of $600.

A company may desire to do this because their stock is appreciating in value. The split lowers the price per share, making it inviting for new investors, without compromising any equity of the current shareholders. For example, I always think of Google, Inc. GOOG as being a company that would garner more investors by splitting their stock and lowering their cost per share. That said, it probably wouldn’t hurt to put Google in your portfolio (right now) regardless of the price (because we’re talking about percentage gain anyway.)

Every Yin has its Yang and splits are no different. A reverse split occurs when a company decreases the total number of outstanding shares without altering the overall valuation of the company.

For example, you also own 100 shares at $6 per share for a total value of $600 in Company B. This company decides to split its stock 1:5. This means that you will only be issued 1 new share for every 5 that you hold at the time of the split. The result would be 20 shares at $30 per share for a total, unchanged value of $600.

A company could “cushion” a fall in its stock price through a reverse split. Effectively, nothing would have changed. However, the perception of current shareholders and potential investors could be falsely supported on the “rise” in value. However, you’re paying closer attention than that.

Other companies may employ a reverse split to maintain the minimum value needed to stay on the exchange – and if that’s the case, there might be more important things to worry about.

Look through the ceremony of the split because a greater understanding of the company is behind it.

I recently had the opportunity to meet a professional poker player. I don’t mean your buddy that won an online tournament one time – a World Series of Poker kinda guy. We discussed a myriad of topics. When I mentioned to him that I was involved in an Investment Club and I had an interest in the market, he nearly dropped his beer exclaiming, “That’s far more risky than anything I do.”

Fair enough, but if that’s what a individual fully adjusted to roller coaster finances and Pepto-Bismol cocktails thinks of investing in stocks – what does the “average” person think?

I’m fearless in the face of risk considering the possible returns of common stock, but that’s my perspective. Of note, investing in the stock of one company is very much like my new friend entering a poker tournament – there are different types of poker/companies, different strategies are practiced in each, and, diversification aside, you should only consider your positions one tournament/corporation at a time.

Stocks are great, but we need to establish exactly what purchasing common stock means:

Stocks are a type of security that provide voting rights to the shareholder regarding the election of the Board of Directors, stock splits, and other company affairs. Additionally, and most importantly, the issuance of stock to the holder represents equity or ownership in the company and entitles the holder to share in the company’s gains by way of dividends (in some instances, not all companies provide dividends) and/or capital appreciation of the stock.

I believe that education is the surest way to mitigate the risks of any situation. He’s got the folds and raises covered, I’m gonna get to work on the puts and calls.