The best month for the stock market to rise

A visual guide to stock splits

Imagine a shop window containing chunks of cheese.

If the value of this cheese increases over time, the price may be more than most people are willing to pay. This poses a problem because stores want to keep selling cheese while people still want to eat it.

The obvious solution is to break the cheese into smaller pieces. That way, more people can afford a portion of it again, and those who want more can simply buy more small pieces.

Cheese and Stock Splits

The total volume of cheese is still worth it, just the portion size has changed.As shown in FIG stock trading As it turns out, the same concept applies to stock splits.

Like a cheese wheel, stocks can be split in a number of different ways. Some of the more common splits are 2-for-1, 3-for-1, and 3-for-2. Less common splits can also occur, such as when Apple increased its outstanding shares by a 7-to-1 ratio in 2014.

Why companies do stock splits

Of course, stocks are not cheese.

The real world of financial markets driven by macro trends animal spiritsMore complicated than the items in a shop window.

If the company wants their stock price to continue to rise, why would they split it, effectively lowering the price? Here are some specific reasons:

1. Liquidity
As our cheese example illustrates, stocks sometimes see prices rise to the point where they are no longer available to a broad range of investors. Splitting stocks (even if individual stocks are cheaper) is an effective way to increase the total number of investors who can buy stocks.

2. Send a message
In many cases, announcing a stock split is a harbinger of a company’s prosperity.Nasdaq finds companies that split stock outperform the market. This may be due to investor excitement and the fact that companies often split their shares as they approach growth.

3. Lower capital costs
Overpriced stocks have spread Broader than comparable stocks. When spreads (the difference between the bid and ask prices) are too large, they can eat into investors’ returns.

4. Meet the indicator standards
In certain specific circumstances, a company may wish to adjust its share price to meet certain index requirements.

An example is the Dow Jones Industrial Average (DJIA), a well-known 30-stock benchmark. The Dow is considered a price-weighted index, meaning that the higher a company’s share price, the more weight and influence it has in the index.Shortly after Apple’s 7-for-1 stock split in 2014, shares fell from about $650 to $90, the company was hit Add to to the Dow Jones Index.

On the other hand, a company might decide to do a reverse stock split. This takes the number of existing shares investors hold and replaces them with fewer shares at a higher price. In addition to the general stigma associated with lower share prices, companies need to keep their prices above a certain threshold or face the possibility of being delisted from exchanges.

Stock Splits Happen, But Not Inevitable

Alphabet will be the latest high-profile company to split its stock in early 2022.the company’s 20 for 1 The stock split, designed to make the share price more accessible to retail investors, lowered the price from about $2,750 per share to $140.

Conversely, Berkshire Hathaway, as we all know, never split its stock. Thus, a single share of BRK.A is worth over $470,000. The legendary founder of Berkshire Hathaway, Warren Buffettthe reasons for splitting the stock run counter to his buy-and-hold investment philosophy.