From: Ray Peck (rpeck@no-spam-rpeck.com)
Date: Tue Sep 16 1997 - 12:00:51 MDT
Keith Elis ('Hagbard Celine') writes:
>Second, a stock split lowers price per share allowing more investors to
>buy a greater number of shares. This has the common effect on share
>price -- an increase.
Do you think that this does not bring about an increase in liquidity?
Let me ask. How easy is it to buy and sell a few shares of Berkshire
Hathaway? Given that the share price is in the tens of thousands of
dollars, I'd say that it's not so easy to find buyers or sellers. Just
as having your money in real estate makes it less liquid (less easy to
convert to cash), so does having it in higher-priced stock.
I admit that there are two coupled forces at work here.
1. a lower price allows "the little guy" to get into the stock, directly
driving up the price, and
2. a lower price makes it easier to trade the stock.
I also agree that stock splits tend to be a sign that the company is
worth investing in, but I don't thing that this has much to do with the
increase in price after a split. I say this for two reasons:
1. If the company is worth buying right after the split, it was worth
buying right before, and
2. In my experience, the price of a split stock rises more *after* the
split, not between the announcement of the impending split and the
split date. If the reason for the run-up was that the split itself
brought attention to the worth of the company, I contend that one
would see more of a run-up after the announcement and before the
actual split.
>Finally, investors are more likely to buy shares at a low or mid-range
>price than a very high price. To keep the share price going up steadily,
>the board should split when it can.
Yes, indeed. Shares trade more readily when they are cheaper. When
things trade more readily, they are relatively more liquid, yes?
----------------------------------------------------------------------
"If they can get you asking the wrong questions they don't have to worry
about the answers." - Thomas Pynchon
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