The Motley Fool

Q: When and why does a company split its stock? Why is Yahoo!’s share price staying well above $250 per share, while other companies split between $100 and $150? — T.W., via the Internet
A: T.W., you seem to have read Yahoo!’s mind. On Jan. 12, the company announced a stock split when it released its quarterly earnings report.
Stock splits are among the most publicized and, in a Fool’s mind, the most meaningless headlines that you’ll see regarding stocks. (And that’s saying a lot, given the current state of reporting on stocks.) If a company announces a 2-for-1 stock split, as Yahoo! just has, that means all shareholders on a certain date in the near future will have two shares rather than one, and the price per share will be cut in half. Thus, if a Yahoo! shareholder currently owns 10 shares valued by the market at $400 each, after the split, the shareholder will have 20 shares each worth $200 (assuming the shares don’t radically change in price between the announcement and the close of the market on Feb. 5, when Yahoo! is due to split).
All of this should appear very meaningless to long-term shareholders — after all, the split changes nothing about the fundamentals of the company. However, when a company does announce a stock split, the share price of the announcing company often jumps up on this “news.” This occurs because an announcement of a share split is often interpreted by the investment community as management’s having confidence in the stock.
Actually, one company whose management has great confidence but has never split the stock is Berkshire Hathaway, whose CEO, Warren Buffett, is considered by many to be the world’s greatest investor. Because it has not split since 1964, a single share of Berkshire Hathaway “A” has increased in value for more than 30 years, and is now priced at about $65,000.
Never splitting a stock, of course, is very much the exception in today’s market. Most companies will split their stocks well before the price per share gets to $200. In part, this is to keep the stock appearing to be at an “attractive” or “affordable” price in comparison to other stocks. If one stock is trading at $200 a share and another is trading at $50 a share, some investors might mistakenly feel the $200 per share stock is “too expensive.” Though splitting a stock doesn’t make owning a designated percentage of it any cheaper in reality, investors as a group are believed to prefer shares of stock at prices below $100 per share.
Investors would do well to ignore stock splits when evaluating whether to make an investment. While a company’s splitting its stock is an indication that the share price has moved up in the past, it is not an indication of where the price will move over the long-term after the split.

Want to get a great education about investing from a man who doesn’t believe in stock splits? Go to and read Warren Buffett’s annual shareholder letters.