Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 6
Dan wrote:

True a stock split has no real significance as far as value but to us poor types that can only afford a few shares with our pitiful cash it offers the opportunity to increase our long term holdings in good or great companies at a minimul cost therefore leading to greater returns in the future. Unfortunatly my time frame is only 10 years to get to finicial independance so I must take greater risks to achieve my goals. Stock splits of the companies I hold or am buying is a god send in increasing my shares. That is of course looking at the company continuing to grow and soon getting back to the presplit price. Just IMHO.

I'm curious how this chain of thought continues to waft through the retail investment community. Let's say I've got $5000 to invest in a company that I have researched and want to buy those shares which cost $200 each. Yet, I feel the price is simply too high and I should wait for a split. I don't mean too high as in valuation, but simply too high for me to justify buying shares at that crazy price level. Let's say I forget about the split business and buy my 25 shares plus pay the extra $7.95, $14.95 or $19.95 commission charge depending on your brokerage arrangement. I've got my $5000 now invested in this company. Total cost = $5014.95 (using the middle commission rate).

Okay, let's say I 'wait for the big cost savings split' to occur which allows us 'poor types' with minimal cash to invest to buy lots of shares and maximize my returns and holdings. I'm already lost with the reasoning, but I'll continue. For the sake of argument, I'll consider that this divine company I have researched and want to invest in with the $200 per share price has announced a split which will occur four or six weeks from now. Yippie I shout - now I can load up. I knew it would be worth the wait. Let's say for the sake of argument that the share price between now and the split four or six weeks later hangs right in there at $200 per share (yeah, right). Splitsville occurs and the price is now $100 per share because in my best of all possible Candide worlds, the equity was fairly valued and nobody bought in anticipation of this great company's split nor did they pile in the day after it split, nor did anyone sell on the 'great split news'. That's good because, the price is right where I want it - $100 - which allows me to really 'load up' the portfolio cart. So, I take my $5000 and buy 50 shares at $100 per share and pay the commission of $7.95, $14.95 or $19.95 to establish my position in this equity. Total cost = $5014.95 (using the middle commission rate).

Now, going out 10 years of holding this equity which I bought for $5014.95 (25 or 50 shares) it has grown to a value of $95,000. Does it matter to me if that value of $95,000 is spread between 50 shares 10 years later (because a stock split never again occurred) or if I now have 800 shares with a total value of $95,000 after four stock splits have occurred. I've still got $95,000 and my selling cost will be the same whether it is 50 shares or 800 shares using my online discount brokerage account commission charge table from above.

I'm confused as to how "it offers the opportunity to increase our long term holdings in good or great companies at a minimul cost therefore leading to greater returns in the future." Would not the return on the equity be the same whether one buys 25, 50 or 1000 shares ten years earlier? Even if one bought 40 lots of 25 shares each to total 1000 shares, using the middle commission cost of $14.95 per trade - that's a total of $598 commission to buy those 40 lots of 25. Even though that would be the equivalent of three shares selling for the initial price of $200 which after 5 splits during the 10 years would be a total of 96 shares. If you had 1000 shares total whether you bought it all at once or via 40 lots of 25 in the beginning before any stock split occurred - the 32,000 shares you have after the five splits during the ten years might make up for the 96 you left on the table due to paying for all of those commissions ten years earlier.

Hmmmm....

BB



Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.