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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.
Since the 2007 financial crisis broke, we’ve been hearing a lot about the carelessness and greed of our financial system. The pursuit of corporate profits, we are told, led our economy to ruin and apparently will do so again in a heartbeat. Big corporations and financial institutions are crushing the middle class underfoot and choking the life out of the American dream. These are the sound bites we hear daily
Corporate malfeasance certainly played a role in the crisis and we are gratified and relieved when we see it punished. But these excoriations of our financial system overlook one important fact: capitalism is a fundamentally democratic institution. All of us reading this blog can—and in most cases, do—participate fully in the capitalism system.
When you purchase shares of stock, those shares represent a unit ownership in a corporation. What’s more, the shares you buy are fundamentally identical to the shares that those “greedy” Wall Street banks and hedge funds are buying, with all the same rights and privileges. They might have more shares but the rewards of ownership are divvied out proportionately. When a corporation pays out dividends every share of the company gets its fair piece; they can’t pay out some owners and not others.
Some of our readers may be thinking, “This is all well and good for the rich people who own stocks, but what about us little folks?” The beauty of this system is that many of us little folks also own stocks. Many of us contribute money out of our paycheck towards a retirement or pension plan, through which we are beneficial owners of stock market investments. That makes us capitalists.
And it’s a good thing, too. Through our collective investments, millions of modest savers are pooling their money to create capital. Our investments and retirement savings turn into factories, datacenters, and hospitals—all of the machinery of modern life. Whether you realize it or not, if you have any investments you may very well own a tiny slice of many of those things. So when you feel you’re being gouged by an overly greedy corporation, just remember that their “unfair profits” are also funding the retirements of millions of regular workers just like you—and possibly you, yourself.
We know the system isn’t perfect. We can’t guarantee that corporations will always act wisely or ethically, and it’s important to remain vigilant. We believe the best and surest way to make sure that our interests are represented by the system is to participate in it. If you want to get involved, call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Stock investing involves risk including loss of principal.