equities | Financial Crooks

There’s been a steady stream of 2-for-1 stock splits in 2013 and upcoming in 2014. For instance, Canadian Utilities and CN split in 2013 and both the National and TD banks have announced a split coming up in early 2014. In each of these cases the stock’s price had risen either close to or over $100. It made me wonder why do companies split stocks and is there something magic about the $100 price mark that triggers a split?

Trading Shares in the Days Before Electronic Stock Exchanges

As I explained in Can I Buy or Sell a Small Number of Shares of a Stock, Say 18? you can buy or sell any number of shares at most online discount brokerages without paying any extra fees or penalties. You do have to pay the full trading commission even if you only buy or sell 1 share, though, which deters most people from flipping very small numbers of shares.

In the olden days, however, you almost always had to buy or sell shares in groups of 100. The package of 100 shares was called a “board lot.” It made person-to-person trading simpler. Selling a non-board-lot, called on “odd lot,” often cost more if it was even permitted. Not long ago, the trading commission on any lot used to be hundreds of dollars; most investors with enough money to justify the trading commissions also had enough money to afford to buy shares in multiples of 100.

(Stocks valued under $1 used to be packaged in lots of 1000 shares or more.)

Keeping the Value of a Board Lot Under $10 000

You can calculate that if a share of a company cost $100 and you had to buy a board lot of 100 shares, you would need to have $10 000 plus the trading fees handy.

This may be where the magic price of “$100 per share” came into the decision-making about splitting a stock. As the price rises above $100 per share, the cost of a board lot increases above $10 000. That may start to price the lot out of reach for some smaller investors.

If the company offers a 2-for-1 share split, each person owning 1 share is granted 1 additional share. For a routine split, the price of the shares and the dividend per share is then also split in half.

A 2-for-1 split would reduce the price of a board lot for a stock with an initial price of $100 per share or $10 000 per lot to $50 per share or $5 000 per lot.

That may increase the attractiveness of the stock to small investors, which in turn may encourage a further increase in the price of the shares.

Why Does It Matter What the Price is Per Share If Investors Do Not Have to Purchase Board Lots?

Now that small investors can purchase shares without buying them in board lots, it’s not clear to me why stock splits are still so common.

They obviously are not mandatory. Here are some examples of companies that haven’t bothered to split their stock to keep share prices low. Today, a share is trading at

$ 535.39 for Apple
$ 1 108.53 for Google
$ 176 300 000 for Berkshire Hathaway A

What Do Companies Say About Splits in Their News Releases?

So what reasons did TD offer in their recent news release about their 2014 2-for-1 share split? From what I can read, they didn’t offer any justification!

CN didn’t offer any justification either.

Apparently it’s supposed to be “intuitively obvious” why the split is needed, to quote my first-year math professor who often used the phrase when describing saddle functions.

The National Bank did offer this explanation: “The Bank is undertaking the share dividend to ensure that its common shares remain accessible to individual shareholders and to improve market liquidity for the common shares.”

Canadian Utilities, which split its shares in 2013, said: “Canadian Utilities is undertaking the share splits to ensure that the Class A shares and Class B shares remain accessible to individual share owners, to increase and broaden Canadian Utilities’ share owner base and to improve market liquidity for the shares.”

Is a Stock Split Just a Mirage to Boost Prices?

When a stock splits by offering more shares at no cost to a person holding existing shares, the value of the corporation does not change. The total dividend does not change either. There is no tangible benefit to the investor because of the split.

So why does the price of a stock often increase after a split?

Logically, it should either go up or down just as it would have prior to the split based on the usual factors to determine the worth of a company.

Illogically, sometimes the price goes up not because of any real change in the value of the company but simply because of a change in perception of the same facts.

Sometimes new investors purchase shares in the company after a split because they seem “more affordable” The fact they could have purchased, say, 50 shares at the pre-split price or 100 shares at the post-split price and obtained the same ownership in the company’s future doesn’t seem to matter.

Also, sometimes investors see the split as a signal that the company expects further growth quickly in its share price. Again, that can result in new investment even though the split itself did nothing to change the company’s outlook.

Yahoo Finance does suggest that a split may make it easier to sell shares by reducing the price a buyer needs to offer. I guess it’s possible that it’s easier to find two buyers with $5 000 each than 1 buyer with $10 000 but I wouldn’t think that was a huge factor for most companies that split stocks.

I have yet to find any evidence to suggest there is a genuine improvement in a company’s performance because of a split. Have you?

Should I Buy TD Before Its 2-for-1 Stock Split?

The answer to this is simple: Would you buy it if it wasn’t splitting?

Related Reading

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Do you think a share split in and of itself increases the value of a company? Or does it just increase the price of its shares? Please share your views with a comment.

UPDATE: This article is historical, from 2013. I no longer invest with RBC Direct Investing.

I don’t invest most of my money in individual stocks but I do invest a portion of my savings in shares of individual companies. Usually I want to know when the price of a stock reaches a certain value because I plan to sell some if it reaches a particular percentage gain. I firmly believe that no one ever went broke taking a profit so I do take part profits as stocks climb. Here’s how I set a price alert for shares of stocks held in my RBC Direct Investing Self-Directed RRSP Account.

Why Would I Want to Set a Stock Alert for my RBC DI Account?

Common reasons to set stock price alerts include

Monitoring when to buy more shares of a stock particularly to buy if the price suddenly pulls back
Monitoring stocks being held for the long term to be notified quickly if they drop abruptly
Checking whether a stock has risen to a price at which you plan to sell all or some of your shares
Watching whether a “bellwether” stock is signaling a change in the overall market or in a segment of the market
Checking whether a stock is trading at a much higher volume or lower volume than usual

How Does RBC DI Advise Me of a Stock Price Alert?

You can opt to receive stock price alerts to

An email address, in HTML format; or
A wireless device, in SMS text format

How to set a Stock Alert for a RBC Direct Investing Account

Sign in to your RBC Direct Investing account.
Click on the Markets tab.
From the horizontal link list, click on: Alerts

Skip the fields in the Create a New Alert section until after you set your Delivery Options. Otherwise the program will not properly set up and save your Alert.

In the Delivery Options section
You can provide an email address or a wireless address but not both.

To receive the alert by email, in the Email text field type your email address.
If you would like to see an example of the email message format, click on the HTML Format link.
To receive the alert by SMS message to your Wireless device, in the Wireless field, type your Wireless device’s address.
If you would like to see an example message, click on the SMS text format link.
In the Delivery Status section, click to select the radio button beside On.
Click on the Save button.

Now you can create a specific alert.

In the Create a New Alert text box, type the ticker symbol for the stock or ETF.
For example, I typed: TD
Click to select the radio button beside the desired stock exchange, CDN or US
Click on the Go button.

A new window opens presenting a long list of options for the alert. You can select from the following list

In the Price & Volume Alerts section

Price drops below $ ___
or rises above $ ___
(Last price $98.85)
Price
select:
[rises above]
[drops below]
the previous day’s close by ___%
Price reaches a new 52 week
select:
[High]
[Low]
[High or Low]
(52 Week High $100.56 on 31/12/13)
(52 Week Low $76.59 on 18/4/13)
Price gaps
select:
[Up]
[Down]
[Up or Down]
___ % or more at opening trade
Price outperforms / underperforms
select:
[SP500]
[DJI]
[NASDAQ]
[TSEA]
by
select:
[1%]
[2%]
[3%]
[4%]
[5%]
over
select:
[one week]
[two weeks]
[three weeks}
Trading volume exceeds daily average by
select:
[50%]
[100%]
[150%]
[200%]
Price crosses its
select:
[15]
[30]
[50]
[60]
[90]
[200]
[15, 30, or 60]
day moving average
Price/Earnings ratio
select:
[rises above]
[drops below]
___
(Current P/E 14.3x)

In the News & Events Alerts section

You can select and customize from the following choices:

Reuters News Stories
Morningstar Research Reports (Be notified when a new report is issued)
Earnings Announcements
select:
[Annual]
[Quarterly]
[Annual or Quarterly]
Dividend Announcements
Split Announcements
Morningstar Rating
select:
[Increases]
[Decreases]

For each type of alert you wish to set:

Click on the box to check it beside the type of Alert
Fill in any required text fields
Make any required selections from the drop-down lists
When your choices are complete, click on the Save Alerts button.
If you are finished, click on the Sign Out button.
For increased security, clear your cache and close your browser session.

How To Review, Edit and Delete Alerts for your RBC DI Account

To see a list of all of your Alerts, click on the Markets tab, then click on the Alerts link.
In the Stock Alerts section, all of your current Alerts will be listed.
- To Edit the alert, click on the Pencil icon under the Edit column; or
- To Delete the alert, click on the X check box under the Remove column.
  1. If you click on the Remove icon, you will be prompted with a message.
    For example, “Remove 2 alerts for Toronto-Dominion Bank?”
  2. To delete the Alert, click on the Confirm button.
If you are finished, click on the Sign Out button.
For increased security, clear your cache and close your browser session.

What Other Alerts Does RBC DI Offer?

You can also set Market Alerts by email only for the TSX, NASDAQ, NYSE and AMEX. For more information see How to Set a Market Alert for a RBC Direct Investing Self-Directed Account.

What I’m Watching for in My Stock Alert

Right now, I’m watching what happens as TD prepares to split in January 2014. Should I buy more now? Just after the split? Or sell now? Decisions, decisions! (Whatever I do, I suggest you strongly consider doing the opposite: that way you’re much more likely to make a profit.)