Ignore stock splits

Q

I would think that Netflix, with its shares near $360 each, might split its stock soon. Would that be a good time to buy? — G.C., Las Cruces, New Mexico

A

Stock splits may seem exciting, but they’re not too meaningful.

When a stock splits 3-for-1, if you originally owned 100 shares, you’d end up with 300. They’re not worth three times as much, though. Their price is reduced proportionately, so if they were trading at roughly $60 pre-split, they’ll be around $20 apiece postsplit. Their total value is $6,000 both before and after the split — 100 shares times $60 or 300 shares times $20.

Whether Netflix splits its shares shouldn’t matter to you. The important thing when investing is to make sure that you’re buying into a strong and growing company and that you’re not paying too high a price. That valuation isn’t measured by the stock price alone: A $9 stock can be overvalued and likely to fall, while a $1,000-per-share stock might be undervalued and on its way to $2,000 within a few years. Assess valuation measures such as priceto-earnings (P/E) ratios, price-to-sales ratios, and price-to-cash-flow ratios, and compare them with previous years and with those of competitors.

A stock split means you end up with more shares, but not with more value.

Q

Is it a red flag when a mutual fund no longer allows new investors?

— P.T., Columbus, Ohio

A

When funds grow very large, their managers can have trouble finding enough good investments for their shareholders’ money. If they resort to less-promising ones, results can suffer. So sometimes they restrict additional investments in order to keep growth in check. That’s generally a good thing.