Posts Tagged ‘stock split’

Why would a company split its stock?

Tuesday, December 22nd, 2009

A company’s value is basically spread out among its shares; the more shares there are, the smaller the percentage of the company each one is worth. Think of it as a simple equation: value of one stock = value of the company ÷ number of shares. So if a company wants to try to manipulate the price of its stock, it has to change some part of this equation. You can’t change the value of your company at will, of course; that depends on your market performance. But companies can change the number of shares they offer, and hence the price per share, by using stock splits and reverse stock splits.

Stock splits are just what they sound like – splitting a single stock into multiple stocks. The most common stock splits are 2-for-1 and 3-for-2. A reverse stock split is also just what it sounds like – in, say, a 1-for-5 split, every five shares become one. Because a company can’t just suddenly generate value, a stock split means stock prices also split: for example, in a 2-for-1 split, each share becomes worth half of its original price. As a shareholder, you don’t have to worry about stock splits because the company will make sure the value of your holdings doesn’t change – if the stock goes through a 2-for-1 split, your shares just double, so you still have the same amount of money.

If the value doesn’t change, why bother fooling around with the number of stocks? If a company is doing very well, a single stock can grow to be worth a huge amount of money. You can’t buy a fraction of a share, and if you have to shell out a huge amount of money just to buy a single share, you probably won’t bother. So splitting the stock makes the price of each individual share go down, and more investors can afford to buy. A reverse stock split happens when a company’s stock prices are low; when the number of shares decrease, the price of a share increases, and the company’s stock appears more attractive to investors.

Buffet Invests In American Economy

Monday, November 9th, 2009

Warren Buffet, America’s most well-known investor, has purchased the Burlington Northern Santa Fe Corporation in hopes that railroad traffic will increase in the future.

  • Burlington Northern Santa Fe is a railroad company that ships products by train all over the country.
  • Buffet believes that railroads will become increasingly popular for shipping and transportation as oil becomes more expensive.
  • Buffet’s company, Berkshire Hathaway, followed his rules of investing in this particular deal: invest in companies that people can understand, and buy quality products at discount prices.

Facts & Figures

  • Buffet will pay roughly $26 billion for the 77.4% of Burlington Northern Santa Fe that he does not already own (at $100/ share).
  • Buffet is splitting Berkshire Hathaway’s B Class stock 50 to 1 (meaning that if you owned 1 share of stock before the split, you know own 50!) in order to pay for the acquisition.
  • In an investor owned $1,000 worth of Berkshire stock in 1965, that same investor’s stock would be worth millions of dollars today!

Best Quote

“This all happened because my father didn’t buy me a train set as a kid.” – Warren Buffet, CEO and Chairman of Berkshire Hathaway