A bit contrary to my opinions voiced earlier, I will say that a reverse split, (IOW e.g. 4 shares becoming 1) is almost certainly bad news for the future price trajectory post- the reverse split.
It’s an admission by management that they’re circling the drain and are about to be de-listed for having a share price too low to trade on their current exchange. So they’re making a move to put the share price back into a normal trading range, and ideally one that will move the stock off the radar of the penny stock shorters and other vulture investors.
IME … If you bought some “bargain” stock, AND its performance has been lackluster since, AND you’ve been sitting on it reluctant to lock in your so-far paper loss, AND they announce a reverse split, THEN sell now and sell hard. Before you get screwed even worse for your poor purchase decision.
Related question…since the Walton Family still owns about 52% of all Wal-Mart stock --what benefits(or drawbacks) if any will this split have for THEM personally?
To a first approximation, stock splits don’t matter for anyone. The Walton family now owns three times the number of shares, each with a value of 1/3 of what it was. Net effect is a wash.
You can tell a story that management is expressing confidence in future stock price gains. But honestly, they are mostly just reacting to price gains made in the past.
Investopedia is a decent source for financial questions.
Here’s their summary:
The Bottom Line
A stock split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to smaller investors and provides greater marketability and liquidity in the market.
Given the dominance of institutional investors and zero commission trading among retail investors, I’m honestly not sure why they bother. Maybe they think a $90 stock just feels more expensive than a $30 stock and that furthermore institutional investors are affected by this illusion at the margin.
Does this indirectly however make your investment more volatile? Before the split your are earning or losing $1 for every $1 the stock goes up or down. Post split you are earning or losing $3 for every $1 the stock goes up or down.
Do the daily/weekly ups and downs of a stock lessen after a split?
The market capitalization remains exactly the same, uncertainty and risk remain exactly the same. Why would you think that movements would be any different in percentage terms?
I’ve never understood this either. If I’m going to buy stock in a company, I’m going to invest $1000 in the company. I don’t care if it’s 10 shares or 30 shares.
All this being said (and thanks, I understand it better now,) stock prices do change. As mentioned above, one of the reasons for this particular split is because the current price has reached a certain level. Over the few years I have owned WMT stock the share price has increased by $20. If, over time, this happens again after the split I will see a benefit. Of course that’s not guaranteed.
Back in the dark ages of 100-share “round lot” trading and monster commissions, keeping the share price to a level where folks who aren’t named Rockefeller could afford to buy 100 shares and pay the 8% commission on top was a real issue. Liquidity was a lot higher when ordinary investors could swing that trade.
Like so much else of received wisdom on any topic, IMO it’s about 20 40 years out of date but is repeated by uncomprehending authors who see it parroted by the uncomprehending authors who came before and are in turn themselves parroted by the uncomprehending authors writing next month.
I would think the lower share cost makes the stock more liquid (it is easier to sell something for $30 than it is to sell for $90) and thus have more churn in the buying/selling of the stock.
As I mentioned earlier, Berkshire Hathaway Class-A stock costs over $500,000/share. Is there a reason for that? If they did a 500:1 stock split and shares now cost $1,000 nothing would change?
Didn’t you still have to buy in blocks then? The theory being if I have $5000 I cant buy 34 shares at $150 but I can buy 100 shares at $50 therefore more buyers.
Why would it be easier to sell something for $30 when that thing is worth one third the amount?
If you previously owned 0.01% of the company worth $40 million and you want to sell it, you still have to find a buyer willing to pay $40 million for 0.01% of the company. The stock split makes absolutely no difference.
I guess the fact that people have such strange intuition for the way markets work is the reason they do stock splits.
I’m thinking less about an institutional investor and more about 10 million retail investors on Robinhood trading from their living room couch.
If you have limited means, buying a $30 stock is easier on the retail investor pocketbook than a $90 stock. Now, multiply that by 10 million people. 10 million shares probably does make a blip.
Put another way, if it doesn’t make any difference at all, why do a stock split?
You were talking about liquidity. Tiny retail investors are not a significant source of liquidity.
All major brokers allow fractional share trading.
People think that people think that people think that it makes a difference… it becomes these layers of everyone knowing it really doesn’t make a difference but thinking that maybe some other people think it makes a difference, and what harm could it do. I think empirical data show that it makes no difference.
The one difference it does make is that if you’re monitoring a stock it’s a little easier to track a number between 0 and 100 than a number like $43,210.
As LSL said, it made more of sense 20, 30, 40 years ago when commissions were higher and partial sales spread over more than one day would hit you with another charge. Now, it’s a puzzle, at least to me.
My reading of the literature suggests otherwise. There’s a debate whether the stock split effect is real or illusory and there’s a debate about its persistence. Here’s one story: management may be happier with a $30 stock than a $90 stock, but they would really prefer that the price doesn’t dip below $10. So ordering a stock split is a signal to investors about management’s view of the company’s underlying prospects.
IMHO, this explanation is too clever by half [1]. Here’s another one. Management wants to brag about their past performance and they do so via a stock split, something they can point to when they apply for the next round of stock options. Dividends changes are more tied to past earnings than future earnings IIRC: I don’t see why it couldn’t be the same for stock splits.
Counterpoint: I have no evidence for my hypothesis and have not contemplated a suitable test. So set it aside. But there is a literature on stock splites. I say that to a first approximation stock splits can be ignored. For a better approximation, you need to read the articles. Either way, it’s a nonissue for retail Walmart investors.
The Berkshire example is an extreme one and is therefore different enough to be almost a separate topic. Recall though that there’s BRK.A with a price just under $600,000 and BRK.B selling for a more reasonable $391 per share.
[1] IOW it’s not clever enough: financial economists love signaling stories.
I think you’re putting too much emphasis on the split and the number of shares.
Look at it this way- if you invested that $99 in one share of Walmart, and it splits 3:1, you now have three shares, each worth $33.
But that also means that everything else is multiplied or divided by 3. If they issued you say… a $4 per share dividend, that’s the same thing as them issuing you a $12 per share dividend before the split. Either way, they’re giving you that $12 share of the profits, but it’s just split across 3 shares rather than one.
The only thing that this might actually affect is the affordability of the share price. $33 per share is ostensibly more affordable than $99 per share, but I would tend to think that it’s not much of a consideration except for maybe small-time investors who aren’t investing thousands at a time, and for whom the difference between $33 and 99 is actually material. But if you’re investing $5000 at a time, you’re not going to care if you have 151 shares or if you have 50 shares (outside of the obvious remainders). You’re more concerned about that $5000, not the number of shares it comprises.
Bumping this with some real world data, and to make sure I’m looking at it correctly. Since the split, the stock price has gone up (as of today) from $56 to $75. Now, I’m “assuming” the value uptick would have happened in any case based on business happenings (this is where I may be wrong.)
So, if I had 90 shares before the split at $168 the value would have been $15,120. If the value increased by $19 to $187 the total would be $16,830.
After the split I would have 270 shares at $56 for the same initial $15,120.
After the $19 increase the total value is $20,250.
So, in this case, the split plus the share price increase worked in my favor for $3,420.
So, unless I’m not seeing this right, the split was actually beneficial.
I think the way to look at it is percentage increase, not the share price increase in dollars per share. The percentage increase probably would have been the same
You need to think about this in percentages instead of absolute dollars. After the split, the stock has increased $19/share, or about 34% ($19/$56). If there had not been a split, the increase would not have been $19, but $57/share (to maintain that 34% increase). The split was inconsequential to your wealth.