Skip to main content
Open this photo in gallery:

Since a single share of Alphabet Inc. traded as high as US$3,030 this week, many small investors might be priced out entirely right now.ANDREW KELLY/Reuters

Is it silly to cheer for stock splits? Perhaps, but it’s hard to resist embracing them as an achievement worth telling your friends about. And splits may give some stocks a slight edge.

Stock splitting has fallen out of favour over the past decade, but it may be moving back into the spotlight after Google parent Alphabet Inc. GOOG-NE announced a remarkable 20-for-1 stock split Tuesday evening.

“I think it’s back,” said Joel Kulina, the head of technology and media trading at Wedbush Securities, in an interview.

“People can feel that they are a bigger part of the story if they can own more shares. Most people know that $10,000 is $10,000, but that’s where human psychology comes into it,” Mr. Kulina said.

The value of an investor’s Alphabet holdings won’t change when the split occurs July 1, subject to shareholder approval. But for each share they own, they will receive 19 additional shares – priced lower, of course.

Alphabet hasn’t said much about why it decided to make the change. The company e-mailed this response to The Globe and Mail: “For some investors, it makes our shares more accessible.”

Fair enough. Since a single share traded as high as US$3,030 this week, many small investors might be priced out entirely right now.

Splitting the shares will allow for smaller purchases, attracting more investors.

Institutions and well-heeled players might not care. They might even point to the downside of making shares more accessible: Smaller investors can bring unwanted volatility to a stock, especially when a particular company or sector moves in and out of favour with investors who chase trends.

“Retail investors are more likely to trade assets on the basis of non-fundamental information,” Sirio Aramonte and Fernando Avalos, senior economists at Bank for International Settlements, wrote in the BIS Quarterly Review last year.

Their paper addressed the meme-stock phenomenon, which underpinned a speculative fervour in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. and raised concerns about the rising influence of social-media-driven investors.

No wonder stock splits aren’t a priority for most companies.

This week, Berkshire Hathaway Inc.’s Class A shares rose above US$480,000 – each. And even the Big Six Canadian bank stocks now trade at an average price of $126 each, more than double the average price of a decade ago.

According to FactSet, the average price of a stock in the S&P 500 has risen to US$199.38, up 250 per cent over the past decade, illustrating what happens to share prices when stock splits are rare.

Canadian Imperial Bank of Commerce has found a workaround for investors who prefer to buy their U.S. stocks in smaller bites: The bank has created Canadian Depositary Receipts for a number of popular U.S. stocks, including Amazon.com Inc. and Tesla Inc. CDRs trade in Canada on the NEO exchange, at prices that are generally far lower than comparable U.S. stocks that trade on U.S. exchanges.

“Our CDRs begin trading in the $20-range, giving investors the added benefit of making high-priced shares more affordable,” said Elliot Scherer, the managing director and head of the Wealth Solutions group at CIBC Capital Markets, in an e-mail.

Stock splits offer another solution – and they can deliver benefits to existing shareholders beyond accessibility.

A split can help a company gain admission to prestigious stock market indexes if, say, it multiplies the volume of shares trading hands or lowers the share price – raising the company’s profile and expanding its shareholder base to large index funds.

Some observers expect that Alphabet’s stock split could make the company eligible to join the prestigious Dow Jones Industrial Average, an index limited to just 30 stocks. Since Dow stocks are weighted by price, a lower-priced Alphabet stock means the company won’t have a disproportionate weighting.

“If they do gain entry into the Dow, you’re obviously going to have index-buying that comes with that. It’s not negative at all,” Mr. Kulina said.

At the very least, a stock split might signal confidence from the company that gains in the share price – up more than US$2,000 over the past five years, in the case of Alphabet – aren’t fleeting.

Hey, and when your five Alphabet shares become 100 shares after the split is completed, you just might feel you’ve accomplished something.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 0:50pm EDT.

SymbolName% changeLast
GOOG-NE
Alphabet Inc. Cdr [Cad Hedged]
+0.08%25.59

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe