Why do companies split their stock? In part, stocks split to keep their price 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 considerably 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 others do so only rarely. It largely depends on how rapidly the stock price is rising. Warren Buffett's Berkshire Hathaway has never split its stock. Accordingly, an original share of Berkshire stock was trading for around $90,000 at the time of this writing. (Buffett did spin off a lower-priced set of Class B shares at one point, though, to help investors of more modest means buy in.) Washington Post, influenced by Buffett, is also clearly not a big fan of stock splits -- its shares have been as high as around $1,000 per share.
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, especially earnings or 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. A $200 stock can become a $400 stock, while a $2 stock is much more likely to fall to $0.02 per share. If your funds are limited, you can just buy fewer shares of whatever company you'd like to buy into.
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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Coca-Cola is a Motley Fool Inside Value pick.
