Six of one or half-a-dozen of the other.

Okay class, the subject for today is--the freebie. For an illustration, turn to the business section of your local newspaper. In the stock market listings you'll notice the initial "s" to the left of some of the companies. The "s" stands for stock split.

A stock split occurs when a company, such as Exxon, Banc One or Mattel, announces that everyone who holds a share of its stock will receive additional shares absolutely free.

"There are a couple of reasons for a company to announce a stock split," says Walter Clark, vice president and investment officer at Wheat First Butcher Singer in Washington, D.C. "Typically, the company, meaning its board of directors, believes that the share price of the stock is overvalued." Last August, Quaker Oats (NYSE symbol: OAT) was trading around $75 a share. After a two-for-one stock split in December, Quaker now trades around $30. By issuing newly authorized shares through a split, the company increases the number of shares trading in the market. With more shares comes an increase in trading activity and, presumably, market value. The split also reduces the share price. "Suppose you've got a stock that trades at $100," Clark explains. "If the company decides to do a stock split, the price will be rolled back to $50 a share. More people are attracted to a stock that they can buy for $50 than a stock that would cost them $100."

Companies offer splits according to a variety of formulas (i.e., a two-for-one, three-for-one, four-for-one, etc.), but the result is always the same--to lower the price and attract a new class of investor.

"It's all a capital markets decision," says Bufus Outlaw, director of research at Sturdivant & Co. in Clementon, N.J. "If you look at Berkshire Hathaway (NYSE symbol: BRK), it trades around $20,000 a share. Only institutional investors can afford that, and that is exactly who the company wants as investors. " Berkshire is the holding company for investment tycoon Warren Buffett's insurance, publishing and candy businesses.

In the stock market everything exists in dichotomy. There is an up and a down. There is a stock split and a reverse stock split. Clark says that either way the motivation is the same. "The company wants to attract another class of investor. However, in the reverse stock split, the goal is to trade up rather than down." In a reverse stock split, the company offers one share for every two or three shares that you hold. The usual result is that the new share price is multiplied. "Say a new company in an emerging market sector trades at $1 a share," says Clark. "While it is every investor's goal to buy in at a cheap price, you don't want to buy stock in a shoddy operation."

Back in December, Cortex Pharmaceuticals, a company with a shallow coffer of capital, announced a one-for-five reverse stock split. Cortex traded over-the-counter at a little more than 65.5 cents before the split. Scott Hagen, the company's chief financial officer says, "We hope a higher per-share price will attract more institutional investors."

The consolidation of shares outstanding and the subsequent increase in share price presents a more reputable picture to potential investors, Clark says.

"Forget about the gimmicks," says Outlaw. "The stock split or reverse split happens after you've done the research and made your purchase."

Outlaw emphasizes that investors should concentrate on a company's earnings, whether they have a sound asset base and whether they are in a position in the market to effectively trade their product.

The announcement of a split sometimes means a company is about to do something significant. Quaker Oats, for example, announced an upcoming stock split and then acquired Snapple Beverage for $1.7 billion.

But when Bush Industries (NYSE symbol: BSH), a ready-to-assemble furniture maker in Jamestown, N.Y., declared a five-for-four stock split in the fourth quarter last year, the stock dividend increased by just 25%.

The different stock split results in these two examples echo a warning issued by Outlaw. "Don't even focus on the trendy news announcements," he says. "You'll do much better in the market sticking with the fundamentals."