Seems like a slew of companies like Coca-Cola and Google have announced stock splits recently. Even Apple is seriously considering a split. Seems like a great opportunity to explain what a stock split is.
Sometimes companies declare stock splits because they want to lower their stock price to make it more attractive to smaller investors. They do this by “splitting” existing shares into smaller pieces that have the same total value. Generally there is no real value in the split itself – it’s like getting four quarters for a dollar.
For example: Coke announced a 2 for 1 stock split that will be distributed on August 10th. If you have one share on August 9th, you would get a second share on August 10th. BUY, BUY, BUY, right? Hold on. If you check the stock price on August 10th, you’ll see that it’s about half. Would you rather own 1 share of Coke at a stock price of $80 a share or 2 shares of Coke at a stock price of $40? No difference:
1 share x $80 = $80
2 shares x $40 = $80
Even though a stock split itself may not have value it can generally be a positive sign and there are other factors that could have real value. For example, the company might increase its relative dividend at the same time.
Trivia: this will be the 11 split for Coca-Cola since its inception in 1919. Contrast that will Berkshire Hathaway Class A shares. Warren Buffett, the CEO did not believe in stock splits so never split the stock, go check its stock price (ticker BRK-A).
The opposite of a stock split is a reverse stock split. In 2011, after the financial debacle a few years ago, Citigroup had a 1 for 10 reverse stock. The stock was trading in the $4’s before the split and in the $40’s after. For every 10 shares you owed, you received 1 share. In this case, the reverse split was intended to improve the psychology (a $4 stock seems awfully close to $0) and to attract more institutional investors some of which do not invest in stocks below $10.
Whether it is a split or a reverse-split, make sure you understand the whole picture before making any investment decisions.
One last thing. Hey Apple, if you’re listening, we at GiveAshare.com want you to split your stock (maybe 20 for 1) so we can lower our price to our customers. Let’s see if they listen.