Stock Split

When investors are given extra shares free for every share they own, it is known as a stock split.

For example, if XYZ company decide to split 3 for 1, then the number of outstanding shares would triple.  Note that a stock split does not affect business fundamentals in the slightest.

It is done by management in order to lower the stock price. This is supposed to make the stock more affordable to investors and increase liquidity. William O’Neil believes a large stock split may cause investors to sell some of their holdings as they see a sudden increase in the amount of shares they own.

Warren Buffett is famous for not splitting his holding company, Berkshire Hathaway’s stock. This has resulted in a very low turnover in the ownership of Berkshire Hathaway’s shares in comparison to other companies. Buffett believes that, if you’re a priest you want people to come to your church reguarly. The same goes for a CEO, you want to see the same investors at the annual meeting year after year, instead of promoting activity for activity’s sake.