It was a typical day for George Toothee, DDS. Wake up to the news station on his clock radio, start the coffee, boot up the computer. His mind drifted to the day's routine of fillings, gum disease, and root canals, and then segued seamlessly to his investments.

While ruminating over the poor performance of his portfolio, George caught a blurb on the radio about stock splits. Or something like that -- he didn't quite catch it. Hearing a bit about an increase in shares, he thought, "Well, this can be a way for me to increase my holdings." Time to visit the old stockbroker again. He hoped this would be the windfall he'd been waiting for.

At that same moment, his stockbroker, the Churner -- who'd been up all night -- was contemplating new and more devious ways to get his clients to trade, trade, and trade. He'd recently been having a dry spell, and needed some fresh ideas. Lately, all they ever wanted to do was hold. It was that darn Motley Fool's influence. One of these days...

George arrived just as the Churner was about to pack it in. Excitedly, George related to Churner what he'd heard about stock splits. Would this work for him? he asked. Would he be able to increase his holdings this way? Was it too good to be true?

The wheels began turning in the Churner's head. He rubbed his hands together in anticipation of his next commission. All he needed to do was to convince George to buy stocks that were splitting, and sell them fast. This was going to be the easiest one yet!

"Well, George, this is a fine idea, but you have to move quickly, or all those extra shares will be gone. So, let's take a look at a list of stocks that are due to split." The Churner began tapping furiously at his computer keyboard.

"I knew this was a great idea!" George thought. "This is a gold mine. It's like having a key to Fort Knox." He watched as stock after splitting stock flashed on the Churner's monitor... to think that all he'd have to do is buy those extra shares, sell them, and double his money immediately... George was all set to start making trades when something distracted him.

"Now, what in tarnation is that awful jingling?" he thought. It was surely the most distracting sound he'd ever heard. How could he think about what stocks to buy with all that infernal bell-ringing going on?

Bells?

George turned around to see if he could discover the source of the noise, only to find Motley Fool standing on the desk, leaning over the computer, playing with the keys.

"You again!" the Churner cried, livid.

"Who are you, and what do you want?" George whispered, embarrassed at the intrusion.

"Hi George. I'm Motley Fool. I just want to chime in here to get you to think before you trade. If this business about stock splits doubling your money were true, wouldn't everyone be doing it? Maybe you should find out more about how they work."

This Fool was as strange as anyone George had ever seen. But he was making more sense every second. George decided to take a closer look at how stock splits work.

"Listen, Churner, I think I'd better read up on this stock split business before I put any money into it... I'll get back to you, okay?"

"That blasted Fool!" sputtered Churner. "How's a guy supposed to make a dishonest day's work?"

*What did George find out when he took that closer look at stock splits?*

1) The stock doubles in shares, but the price doesn't change?

2) The company gives away some shares to a select few stockholders?

3) The stock doesn't really split, but the original cost per share goes down?

4) When the stock splits, the original price per share, or cost basis, splits as well?

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

Answer: #4

Upon reading more about stock splits, George discovered that when a stock splits, the shares you own split, and the original price per share, or cost basis, splits as well, keeping the proportionate interest between shares and cost unchanged.

Example: MICROSOFT CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> splits 2 for 1. You own 100 shares for which you paid $10 per share (okay, so we have very fantastic dreams). You invested $1000. Post-split, you have 200 shares, with the cost basis (original purchase price) adjusted to $5 per share. You still invested $1000. In other words, the proportionate relationship between investment, cost per share, and number of shares remains unchanged. However, now the price of Microsoft has become far more attractive to potential investors, which is the main reason companies undertake stock splits.

Think about it. Who wouldn't want to buy Microsoft at $5 per share?

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