You don’t directly own the shares in that stock. You own a particular fraction of a block of stock owned by the fund. That block of stock is an integer number of shares.
And it is possible to buy fractional shares at some brokerages.
But they do the same thing, buy up a block and then credit you with a fractional share. You don’t actually have a certificate saying .25 shares, the brokerage has the certificate (probably not physically, as it’s all electronic now), and has on its books that you own 25% of it.
That’s a fairly recent change though. It wasn’t really an option when I first started looking into the market a few decades ago.
From what is described in the OP, a stock split would have little to no importance to the employee owners. However, it would seem to me that the founder’s family and the CBA? would have an interest. You don’t state so, but I’m guessing they do have the ability to trade on some sort of market. So, the attractiveness of a lower per-share price, as described by other posters here, would be a factor.
The same thing applies if they’re handing out shares as part of compensation. Splitting allows them to hand out proportionally smaller amounts- they can give 150 employees 1000 of those $1 shares each, instead of having to deal with single $150k shares.
I retired a couple years ago from a company that does like the OPs – privately held stock, an annual bonus in the form of stock held until your leave the company. About 20 years ago, it had a 10-1 split. The public explanation was pretty much what @China_Guy gave as his first answer. They said people – especially the new employees – probably weren’t getting excited about receiving 8.723 shares of stock (or whatever) and would be happier about receiving 87.230 shares even though it was the same amount of money. I don’t know if they heard anyone complaining about that or if it was just assumed, but considering how many people seemed excited about the split, they may have been right. There was never an attempt to go public. All these years later, it’s still privately held.
The only financial change it made was that the value of the company went down by however much they paid to make the change. On a per employee basis, I’m sure it was negligible.
If it’s not public, who do you sell it to when you want to diversify or retire?
How much of your retirement ends up being dependant on the performance of this one company?
Your question was answered, but I wanted to add that mutual funds are not stocks. They are funds which hold stock. When you buy stock, you very typically have to purchase them in whole numbers (there are a lot more brokerages that allow fractional purchases these days, though). When you purchase mutual funds, you do so in dollar amounts (i.e. you buy $1000 worth of a particular fund).
I expect the company itself buys back the stock from it’s annual profits, before the profits are either invested or dispersed as dividends.
And such a buy-back may be part of the reason for the split. Do the employees have the option to sell stock back to the company before they leave the company? If you split the stock, it makes it easier for people to sell part of their stake for cash now, instead of cash later. This might be important for someone who’s looking to buy a house or some such thing, who needs a lot of cash right now, but maybe doesn’t want to sell everything.
In the case of my company, the retirement account included mutual funds. When the value of the company grew so the the company stock made up 25% or more of your account, you were given the opportunity to transfer some of that to the mutual funds. I never did that because company stock outperformed the S & P 500 quite consistently.
Of course, if the company had suddenly stopped being a good company and the stock price plummeted, I’d still be working (somewhere else) today. They did a good job of mitigating risks, but you can’t eliminate them.
Fractional shares are a thing offered now by every major broker.
https://www.fool.com/investing/how-to-invest/stocks/fractional-shares/
Fractional shares also existed in the past. Say you owned 89 shares of XYZ, which then did a 10 for 1 reverse split. You would wind up with 8.9 shares. This wasn’t common, though.
Much more frequent were and are stock dividends.
The distributions are paid in fractions per existing share. For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares for every share owned by a shareholder. The owner of 100 shares would get five additional shares.
Until computers became the norm, individual stock sales were discouraged. Customarily stocks were bought in blocks of 100. The bookkeeping, when stock certificates had to be hand-noted and physically transferred, was eased and therefore the costs of buying and selling were greatly reduced. Today’s market has almost eliminated both obstacles.
Seriously, though, if all you can afford is one $50 share of stock, or worse, 20% of a $250 stock, there’s a better place in your life to put that money.
You can sell it as a private person, just like any other personal property. (Some restrictions may apply in certain circumstances.) Public stocks are available publicly to anyone: you can let a broker handle the transaction and the buyer need not be known to you.
Traditionally, it was sometimes done to push out smaller holders. It costs money to send all the financial information every quarter to every person that holds 5 shares.
Anyone holding only a fraction of a share after the reverse split would be cashed out.
It’s not just what one “can afford”. My grandfather used to buy us $100 in stock every year for each of his grandchildren. It’s a tradition that I’ve started carrying on for my nieces and nephews.
And then there are some stocks like the aforementioned Berkshire-Hathaway, where if you can afford a single share, then you probably don’t need financial advice from a random message board.
That seems as though it would make it much harder to sell. If the company isn’t buying them back, then you may be trying to retire with a bunch of certificates you can’t liquidate.
No, it absolutely makes it infinitely easier to sell. As your property you have free range to do with it what you like. Maybe the company will buy it back. Maybe another employee will buy it to increase shares. Maybe a raider wants to buy up shares. Maybe you want to give it to your grandchildren. Maybe the company has a clause that it has to buy back stocks if offered. Or maybe the company goes bankrupt and it becomes worthless. Whatever the circumstances, you are in charge and can make an individual decision, just as with any other stock whether public or private, or any other personal possession that contains value.
Though Berkshire Hathaway has Class B shares, selling for $310.62 at the moment, compared to $417,000 for a single Class A share.
You should be careful. The advisor motto of “past performance is not an indication of future performance” isn’t just fun to say, it’s fun to live by as well! Being that heavy in just a single company’s stock is about as risky as it gets in the investment world.
Ask anyone who worked for Enron about why it’s bad to have all of your eggs in one basket.
I mean, I’ve bought and sold stock, and that was pretty easy. Just go to my brokerage account and click a couple buttons. (I used to have to actually call a broker, but it’s been decades since that.)
And you say that private is “infinitely” easier? I’m not sure how it could be. If I sell a stock, I just click a couple buttons, and it is sold. Are there buttons I can use to sell a stock in a privately owned company? I’d think that I’d actually have to line up a seller myself first, then have them pay me, then I’d have to transfer ownership to them. I can’t see how it wouldn’t require more steps and work, and also have a much smaller market to sell into than a publicly traded company.
Maybe, maybe, maybe. But maybe not.
Yep, that’s a possibility as well.
I’m not sure your point here. Sure, you are in charge and can make decisions, just like with anything else. But how, exactly, does that make it infinitely easier to find a buyer and complete a trade for a private stock than for a public stock?
In a privately held company like yours, it will have no effect on the value of anyone’s shares. You note that the company is employee owned and that they grant shares to employees and repurchase shares from retirees. One reason to do a stock split might be that this particular company might not be able to issue fractional shares and the smaller share price allows them to size the award of stock grants more
finely. If they transact in fractional shares, this isn’t the reason. More likely, they just want employees to get more excited about getting a bigger number of shares.
There is no particular reason to do the stock split before they announce any intention to go public so I wouldn’t worry about that.
He probably does own the fractional shares of that mutual fund. Mutual funds sell in fractional shares. Mutual funds buy and sell at NAV and it’s trivial for them to deal with fractional shares.
Stock is issued in units (whole individual shares) by essentially every public company. Maybe there is an exception, but I’m not aware of it. On public markets, it would have been almost impossible to keep track of trades of fractional shares. Markets weren’t set up for it. Stock trades on exchanges in units, and historically it was cheaper to trade in round lots of 100 shares. Stock splits helped keep the stock price in the range where investors could afford to trade round lots. Trading in round lots doesn’t really matter anymore but trading in units remains a market feature.
There are brokers who will sell you a fractional share through various programs. The broker holds stock in whole units and they credit their customers with fractional shares. The broker just hold in its own account whatever fractional share is necessary to make sure the broker can trade in whole units.
Warren Buffet and Berkshire are suis generis. Buffet thinks stock splits are pointless so he won’t do them. In fact, there was demand decades for lower priced BRK.A when it was trading (if I recall correctly) for something like $70,000 per share. Someone was in the process of launching a mutual fund that was going to invest exclusively in BRK and offer fund interests for $1000 that would have enriched the manager for doing almost nothing. Buffet hated the idea of investors paying another layer of management fees so Berkshire Hathaway created the Class B shares, BRK.B, with a price point around the $2000 minimum investment the fund intended to launch with.
You can also buy a specific number of shares if you choose but nobody bothers. Most people want to invest a certain dollar amount and since the fund will sell them fractional shares, they can invest precisely the amount they want.
But in that case, the company would pay the cash value of the fractional share. They wouldn’t issue a fractional share to a person. If there is a company that did a reverse split and didn’t pay out fractional shares in cash, I’d be interested in hearing about it.
Meh. Every investor has to start somewhere. It’s cheap and easy to trade fractional shares today so if you want your nephew to start learning about investments, why not start with some fractional shares?
It’s not as simple as that because of securities registration and reporting obligations. Depending on how you got the shares, you might be restricted from reselling them altogether or permitted to sell them only to an accredited investor (mostly institutions). I could spend a semester discussing this.
Right. In one case I recall, a company did a 100:1 reverse stock split at midnight and a 1:100 stock at 12:01 AM. During that minute, they eliminated every shareholder who held less than 100 shares, which greatly reduced their cost to send annual financial reports and proxy statements even though the two splits netted to have absolutely no effect whatsoever on the stock price.
Even the Berkshire Hathaway people have a problem. What if they have two shares but they want to buy an average new car? Should they sell one share and lose the investment opportunity for the rest of the money?
In investment circles, this is sometimes called “uncompensated risk.” That is, it doesn’t increase the expected return of your portfolio but it does expose you to greater volatility.
Yes indeed - here in New Zealand, we have a company called Sharesies that allows you to buy whatever dollar value of a share you feel like, even down to a couple of dollars-worth of a stock that’s trading for hundreds or thousands of dollars. It’s been quite successful in tempting people who otherwise wouldn’t want to start investing in stocks to give it a go.
To the OP, seems like a high stock price might cause allocation problems (as already pointed out above) so reducing the price with a split avoids having to track fractions of shares.
I’d argue that Enron was much more a cautionary tale about the risks of working for a company run by crooks & charlatans using a fundamentally fraudulent business model, than it is a caution about eggs concentrated in baskets.
Although for sure if you’re going to work for such a company, the smart worker cashes the paychecks instantly upon receipt and puts their money elsewhere.
In the circumstances, I believe the above is by far the most likely reason for the split.