Arithmetic is important in our line of work, but its lessons can be found all over.
My older brother gave me one such lesson when I was very young. There was a particular joy in convincing any of my siblings to share candy or treats with me. One day, my brother offered to split a piece of taffy.
“Mark,” he said, “how would you like a fourth of this piece?”
“Yes!” I said.
“If you think that sounds good, what about a tenth of this piece?”
I didn’t know much then, but ten was definitely bigger than four, so this development was promising. I nodded.
“Great! But how about a twentieth of it?”
I could barely contain my excitement. What a deal!
By the end of this process, we settled on a figure. My brother tore me off the tiniest corner of the taffy, and I learned a valuable lesson about math.
At the risk of oversimplifying, we thought of this story again with this news of some major companies executing stock splits.
A stock split is what it sounds like: a company increases the number of shares issued to holders by splitting each existing share into some fraction. Apple recently split four-for-one; Tesla just split five-for-one. (Unlike the taffy lesson, they don’t keep the other pieces! Shareholders went from owning one share to owning four or five, respectively.)
Why split stocks? In years gone by, the idea was that soaring prices made some companies out of reach for smaller investors. A stock split on an expensive company made a single share more affordable, and in theory more investors could get a piece of the action.
Today, many trading platforms allow investors to purchase “fractional shares,” which are also just what they sound like: even if you can’t afford a whole piece, plenty of platforms will still sell you a corner of it.
So why a stock split? Even if it’s not doing much to make the company more accessible to more investors, the move still communicates that idea. It’s a strong marketing campaign for valuable companies.
What does it mean for us? Not much. Remember, we want a piece of the action: any way you slice it, the ingredients and quality of the piece haven’t changed.
A stock split changes the mechanics of how the company is traded. It does not change the mechanics of the company—its outlook, its output, its fundamentals.
Math will always be important in our work, but in this case, we’re not going to let the numbers complicate the situation. Whether we’re splitting the taffy in two pieces or twenty, we know what we’re getting.
Clients, if you want to talk about this or anything else, please write or call.
Stock investing includes risks, including fluctuating prices and loss of principal.