I dont care for leverage and the portfolios of these funds consist only of swaps contracts on their underlying indexes, making them very unattractive to me.

The stocks of strong companies go up in price. Sometimes, the stock price goes up so much that the company decides to split its shares so that a share is more affordable for the average investor. A typical stock split is 2-for-1. For example, if you had 100 shares of a $150 stock, after the 2-for-1 split you would have 200 shares of a $75 stock. Stock splits can be much more than 2-for-1 as was the case with the 50-for-1 stock split of Warren Buffetts Berkshire Hathaway Class B (NYSE: BRK-B) shares in January 2010.

Stock Splits

As I discussed in Cash vs. Stock Dividends . a stock split is a form of stock dividend where the company issues additional shares to its stockholders. Issuing new shares is similar to the Fed printing money; its a form of inflation that debases the value of each share and makes them worth less. Cutting up a corporate pie into more slices doesnt change the size of the pie it simply reduces the size of each slice. Consequently, a stock split is a purely cosmetic corporate action that has no bearing on a companys actual business prospects. The impetus for a stock split (e.g. a sharply appreciating stock price), however, is a sign that a company is doing well and may continue to do well.

Reverse Stock Splits

The reverse is also true. The stocks of weak companies go down in price and sometimes they go so far down that the company decides to do a reverse stock split. Many institutional investors are not allowed under their charters to purchase stocks trading under $5 per share, so companies do whatever it takes to keep their share price at $5 or above. In a reverse stock split, a shareholder gets fewer shares rather than more and the value of each remaining share is higher. Recent examples of reverse stock splits are American International Groups (NYSE: AIG) 1-for-20 reverse split in July 2009 and Proxim Wireless (Other OTC: PRXM.PK) 1-for-100 reverse split in May 2010 .

Companies that Undergo Reverse Stock Splits Underperform

Academic studies have found that companies that engage in reverse stock splits on average underperform the overall market going forward. A 2005 paper by professors at City University of New York (CUNY) concluded that reverse stock splits tend to be strong indicators of poor performance afterward. Look at the following data which measures the relative performance of reverse-split stocks six months after the split: