Why Do Stocks Split?


Why do stocks split?  According to Wells Fargo Advisors, when a company feels its stock price is getting too expensive to appeal to individual investors, it can decide to do a stock split to lower its per-share price.  When this occurs, you now own more shares, yet the amount of equity you own in the company remains the same.

The stock split may not directly affect your portfolio. However, the lower-priced shares may eventually attract more buyers, eventually driving the stock price up over time. If that happens, you could benefit from the split and from the resulting share-price increase.  Unfortunately, stock splits are occurring less frequently than in prior years.

Here’s what you need to consider:

    • Don’t wait for a split. If you’re putting off buying stock in a particular company because you hope the stock will split and the per-share price will drop, don’t hold your breath. Buy stocks according to ongoing purchasing strategies upon which you and your Financial Advisor agree and that make sense for your portfolio.
    • Revisit your individual stock-buying strategy. It can be very satisfying to invest in certain companies you really like. However, individual stocks tend to be more volatile investments than aggregated funds such as an investment designed to track performance of the S&P 500® Index or Russell 2000 index. Be sure you have a well-diversified portfolio before and after you consider adding individual stocks.
    • Consider gifting differently to kids and grandkids. In the past, you may have enjoyed giving younger family members individual stocks — maybe in companies that made their favorite cereals or digital devices, for example. You can still do that, but with fewer splits happening over time, the per-share price could limit how many shares you can give. The 2017 annual gift tax exclusion of $14,000 will increase to $15,000 beginning in 2018.

If you have any questions regarding stock splits or gifts to family members, contact Steve Siesser at ssiesser@verizon.net