Stock Splits Are a Cosmetic Gimmick to Appease Investors

What is a Stock Split?

A stock split is a price manipulation wherein a corporation lowers the price of its shares, and gives the shareholders more shares, with the net effect being the same dollar value that the shareholder previously owned.

A “two-for-one stock split”, also expressed as a “2:1 stock split”, means that an investor who previously owned 100 shares of a $50 stock now owns 200 shares of a $25 stock.  In each case, the investor owns $5000 worth of stock.  Shares can also be split 4:1, 3:2, and with other ratios as well.

Why do Stock Splits Excite Investors?

Investors mistakenly believe that a lower share price indicates a stronger likelihood that they will achieve capital gains on a stock.  However, this is a false assumption.  Stocks do not go up and down according to their share prices; they go up and down according to their value.  Value is determined by balance sheet numbers and economic factors.  The share price is a result of value, not a cause of value.

Investors also mistakenly believe that their ability to “buy more shares” via a lower stock price somehow increases the likelihood of capital gains.  But whether they buy 100 shares at $50 in XYZ Company, or 200 shares at $25, it’s still $5000 worth of stock.  Since nothing on XYZ Company’s balance sheet has changed, pre- and post-split, it literally makes no difference how many shares an investor acquires for their $5000.  If they had purchased 5 shares at $1000 each, they would still have the exact same likelihood of earning capital gains in XYZ Company stock, expressed via total dollars earned, as they would have in any other number of shares vs. price scenario in XYZ Company stock.

If it were true that lower prices caused shares to rise faster than higher prices, then it would logically follow that companies would be splitting their stocks constantly.  But that is not the case at all.

Do Stock Splits Increase the Value of Shares?

No, there is no evidence that this happens.  It might be true that individual investors might buy more shares of a $25 stock than they would if the price were still $50, but individual investors do not buy enough common stock to move markets or share prices.  (That is not the case, however, as pertains to mutual fund investing.  Individuals can definitely buy and sell enough mutual fund shares, during peak periods of buying and selling, to cause the prices to rise and fall.)  Institutions — pension funds, mutual funds, etc. — buy enough shares of common stock to move markets, and institutions do not make decisions based on share price.

Why Do Companies Split Their Stocks?

Companies split their stocks to make the individual investors feel warm and fuzzy.  Companies know that individual investors get excited at the prospect of buying a “cheaper” stock, and therefore some companies feed into that perception by catering to those investors and periodically splitting their stocks.  It is simply a “feel good” move, with no corresponding relation to stock valuation and potential capital gains.  

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Happy investing!


Crista Huff


Goodfellow LLC

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