How Much Does Stock Price Even Matter?

Should investors care about the number they see first?

Mar 29, 2014 at 11:00AM

Pennies
Source: Flickr / r-z.

All over the sides of investment websites are spam ads telling people how they can buy stocks for only pennies. For individuals with less investing experience, these ads can work by tricking these people into thinking they're getting an amazing bargain.

But more experienced investors know that penny stock spamming sites are usually set up in a way to ensure the real profits go to the stock promoters, not the person clicking on the ad. In fact, not only are the ads misleading, but the super low stock price can also serve as a red herring to trick people into thinking they're buying on the cheap when they really aren't.

But outside the penny stock world, how much does the actual share price really matter?

Adjusting the price
Through the use of forward and reverse stock splits, companies can adjust their share price into a range they see as more beneficial to the company. For example, share prices below $5.00 carry less corporate prestige and keep some institutional investors out (more on this later) but with a shareholder vote, a reverse split can carry shares back up to higher levels.

Citigroup (NYSE:C) and American International Group (NYSE:AIG) took advantage of reverse stock splits after their share prices tanked below $5.00 following the 2008 financial crisis. Citigroup's 1 for 10 reverse split and AIG's 1 for 20 reverse split carried the share prices back into the same nominal range as more stable institutions that weather the crisis.

Other companies have used forward stock splits to make shares closer in nominal price to peers and other major companies. Today, Microsoft (NASDAQ:MSFT) is worth around $335 billion but shares trade for around $40 each. Microsoft didn't start out with its current 8.3 billion shares; instead it underwent a total of seven 2 for 1 stock splits and two 3 for 2 stock splits since 1987. All this has helped to keep Microsoft's nominal share price relatively stable while the company has vastly grown in value.

Stock splits are common within the market and have allowed companies to control their nominal share price even after major growth or major collapse.

Institutional demand
As arbitrary as stock prices themselves may seem considering the ways companies can change them through forward and reverse stock splits, many institutions still require a share price of at least $5.00 to buy a stock. This was a major reason behind the reverse splits at Citigroup and AIG, as both companies wanted to keep their stock as something big institutional buyers could purchase.

Exchange rules
The New York Stock Exchange and the NASDAQ have many rules for maintaining a listing and among those rules is a minimum share price requirement. Both exchanges threaten to delist stocks that trade under $1 for an extended period of time, however, companies are allowed to run a reverse split to boost their share price higher.

Although both exchanges temporarily suspended the rule during the worst of the 2008 financial crisis, the rules are back in force today. When a company falls on tough times and its share price falls below the $1 level, the exchanges will serve them with a notice. In many cases, the company will run a reverse split thereby satisfying the requirements while not actually changing anything in terms of operations or finances.

Should it matter to you?
Since companies can generally adjust their share price to the nominal level they want, share price itself should not be a major determinant in investing. Instead you should look at the fundamentals behind the company and whether its particular characteristics of dividends, value, and growth make it a buy or sell.

You should also look at the share price performance charts as these factor in forward and reverse stock splits and provide a better picture of company history than current share price alone.

What should you look for in a stock?
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Alexander MacLennan has the following options: long January 2015 $40 calls on Citigroup, long January 2015 $45 calls on Citigroup, long January 2015 $50 calls on Citigroup, long American International Group warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group, Citigroup, and Microsoft and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers