Why Companies Split Stock

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Stock splits get many investors all excited, but in many ways they're really non-events. One reason companies split shares is so that the price will remain psychologically appealing. Reducing a stock's price makes some investors think (incorrectly) that it's a better value.

Sometimes, not splitting would mean that few people could afford even a single share. If, in its 80-odd-year history as a public company, Coca-Cola (NYSE: KO) had never once split its stock, one share would be priced at well more than $200,000 today. Not too many people could afford even a single share. In fact, Coke has split so many times in its history that if you had bought just one share when it went public in 1919, you'd have more than 4,600 shares today.

Some companies split their stock fairly frequently, while it's a rare event for others. It largely depends on how rapidly the stock price is rising. Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has never split its stock. Accordingly, an original share of Berkshire stock was trading for around $93,000 at the time of this writing. (Buffett did spin off a lower-priced class of shares at one point, though -- called Class B shares and sporting the ticker symbol BRK.B -- to help investors of more modest means buy in.)

With stocks, just as with any purchase, examine what you're getting for the price. Study the company and compare the stock price to other numbers, such as earnings or better yet, cash flow. A low price might be inviting, but a $200 stock can be a better bargain than a $20 stock -- and can be an even better buy than a $2 stock. Remember -- a $200 stock can become a $400 stock, while a $2 stock isn't so unlikely to fall to $0.02 per share. If your funds are limited, you can just buy fewer shares of the company.

It's always fun to suddenly own more shares, but splits are like getting four quarters for a dollar. They're not cause for celebration.

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