Common sense and investing wisdom dictates that an investor should look the long run and diversify. Many of us engage in wise investing through our retirement planning via 401K or IRA accounts that are generally contributed to and left alone to compound for years. The diversification portion is achieved, by default, through mutual funds.
There are however some stocks (not counting ETF's) that are relatively diversified by definition, because the underlying companies comprise businesses of various types. General Electric (GE) is one such company. Berkshire Hathaway (BRK) is another, headed by the famed Warren Buffet. There is however one problem (at least for the average investor) buying shares in Berkshire Hathaway. Today's closing share price of that stock was $100,000. Now that's a tidy sum, putting the stock well beyond the affordability levels of many investors who would want to own a piece of this conglomerate.
Most companies faced with surging stock prices choose to partake in what is known as a stock split. As an example, a company whose stock price has reached $100 per share, might opt for a 2-for-1 stock split where each share turns into two with the share price at $50. It's a zero sum game. It has no effect on the market capitalization of the stock, and the shareholders see no difference in the values of their holdings at the moment the stock is split.
The general rationale behind a stock split is that it makes owning the shares more affordable and therefore it attracts more demand. In some cases it does work as intended and the stock sometimes surges upward post-split. The increased volume also comes with the side-effect of volatility. Berkshire Hathaway, however, has decided that it can do without the volatility. I suspect most investors in that stock are institutional holdings (such as companies and mutual funds) or very wealthy individuals. Today the traded volume for BRK was a measly 690 shares, with the low and high of $99,900 and $100,250 respectively. No doubt the difference between the bid and ask prices were in the tens of dollars and not pennies as most stocks typically experience.
Just to compare, GE's closing prices today was $35.53 with a trading volume of 26,087,600 shares. Accounting for all the GE stock splits over the years, the stock's effective split works out to 4608-for-1. If GE had never split, its share price would be $163,722.24 today and the traded volume would be about 5661 shares. Adjusting GE's stock price to that of BRK, the volume works out to about 9268 shares for GE or about 13.5 times the BRK's traded volume. Okay, I admit this is totally unscientific and a stock's traded volume is more affected by the condition of the company, forecasts, analysis, and the mood of the investors, among other factors, than its price per share. But if we were to accept this piece of information as valid for the moment, the conclusion would be that splits do indeed create more interest in a stock. Now we'll just wait for Warren to declare a 10,000-for-1 split. Sure, I might buy a few Berkshire shares at $10 a piece.
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