Connect with us

Investor Education

A Visual Guide to Stock Splits

Published

on

visual guide to stock splits

A Visual Guide to Stock Splits

Imagine a shop window containing large pieces of cheese.

If the value of that cheese rises over time, the price may move beyond what the majority of people are willing to pay. This presents a problem as the store wants to continue selling cheese, and people still want to eat it.

The obvious solution is to divide the cheese into smaller pieces. That way, more people can once again afford to buy portions of it, and those who want more can simply buy more of the smaller pieces.

cheese and stock splits

The total volume of the cheese is still worth the same amount, it’s only the portion size that changed. As the infographic above by StocksToTrade demonstrates, the same concept applies to stock splits.

Like wheels of cheese, stocks can be split a number of different ways. Some of the more common splits are 2-for-1, 3-for-1, and 3-for-2. Less common splits can take place as well, such as when Apple increased its outstanding shares by a 7-to-1 ratio in 2014.

Why Companies Do Stock Splits

Of course, stocks aren’t cheese.

The real world of the financial markets, driven by macro trends and animal spirits, is more complex than items in a shop window.

If companies want their stock price to continue rising, why would they want to split it, effectively lowering the price? Here are a some specific reasons why:

1. Liquidity
As our cheese example illustrated, stocks can sometimes see price appreciation to the point where they are no longer accessible to a wide range of investors. Splitting the stock (i.e. making an individual share cheaper) is an effective way of increasing the total number of investors who can purchase shares.

2. Sending a Message
In many cases, announcing a stock split is a harbinger of prosperity for a company. Nasdaq found that companies that split their stock outperformed the market. This is likely due to investor excitement and the fact that companies often split their stock as they approach periods of growth.

3. Reducing Capital Costs
Stocks with prices that are too high have spreads that are wider than similar stocks. When spreads—the difference between the bid and offer—are too large, they eats into investor returns.

4. Meeting Index Criteria
There are specific instances when a company may want to adjust its share price to meet certain index requirements.

One example is the Dow Jones Industrial Average (DJIA), the well-known 30-stock benchmark. The Dow is considered a price-weighted index, which means that the higher a company’s stock price, the more weight and influence it has within the index. Shortly after Apple conducted its 7-to-1 stock split in 2014, dropping the share price from about $650 to $90, the company was added to the DJIA.

On the flip side, a company might decide to pursue a reverse stock split. This takes the existing amount of shares held by investors and replaces them with fewer shares at a higher price. Aside from the general stigma associated with a lower share price, companies need to keep the price above a certain threshold or face the possibility of being delisted from an exchange.

Stock Splits Happen, but are not Inevitable

Alphabet will become the most recent high profile company to split their stock in early 2022. The company’s 20-for-1 stock split aims to make the share price more accessible to retail investors dropping the price from approximately $2,750 to $140 per share.

Conversely, Berkshire Hathaway has famously never split its stock. As a result, a single share of BRK.A is worth over $470,000. Berkshire Hathaway’s legendary founder, Warren Buffett, reasons that splitting the stock would run counter to his buy-and-hold investment philosophy.

Click for Comments

Investor Education

Ranked: The Best Stock Brokers for Investors and Traders

Whether you’re searching for low fees or an easy-to-use trading platform, this clear breakdown can help you find the best stock brokers.

Published

on

A heat map scoring the best stock brokers on a variety of categories like research and education; most of the category names and broker names are obscured from view in this preview image.

Published

on

The following content is sponsored by StockBrokers.com

Ranked: The Best Stock Brokers for Investors and Traders

Choosing the right online trading platform might seem tricky. There are lots of options, and finding the best stock brokers could require a lot of time and research. Luckily, a team of experts has already done the work for you!

In this graphic from StockBrokers.com, we show how stock brokers performed in a variety of categories so you can make an informed decision.

Breaking Down the Best Stock Brokers

StockBrokers.com analyzed 17 select brokers using actual trading accounts or demo accounts. 

The below table shows the overall scores, with 100% being the highest possible score. It also breaks down ratings in the ease of use, mobile trading, and commissions and fees categories, which have the heaviest weightings in the overall score. 

Stock BrokerOverall Ease
of Use
Mobile
Trading
Commissions
& Fees
Fidelity9910099100
E*TRADE971009990
Charles Schwab971009790
Merrill Edge941009690
Interactive Brokers93809990
Firstrade88809490
tastytrade85908990
Ally Invest85907990
Webull85909190
Robinhood841009090
TradeStation82709090
J.P. Morgan
Self-Directed
Investing
82857990
Vanguard78955690
Tradier77907590
eToro77858790
SoFi Invest74906490
Public.com70856890

Source: StockBrokers.com as of January 23, 2024. The overall score is based on the following category weightings: 25% ease of use, 25% mobile trading apps, 20% Commissions and fees, 10% investment options, 10% research, 5% platforms and tools, 5% education.

Fidelity has the top overall score in 2024, with an excellent app, clear navigation, and low fees. When it comes to fees, Fidelity skips many charges that are common among other brokers. It also doesn’t accept payment for order flow, which is when brokers direct your orders to market centers that pay them a referral fee. 

E*TRADE and Charles Schwab are tied for second place when it comes to the best stock brokers. According to StockBrokers.com, E*TRADE has the best platform for mobile trading. The company offers one app focused on casual investors, and another for beginner to intermediate investors that has a useful—but not overwhelming—number of tools. 

Charles Schwab, on the other hand, boasts the best desktop trading platform where investors can keep track of huge watch lists and follow streaming market news.

How Brokers Bring Additional Value

Apart from giving you the ability to trade stocks online, brokers also offer other perks like trading tools and education. Here’s how the same 17 brokers scored on these types of features.

Stock BrokerInvestment
Options
Research Platform
& Tools
Education
Fidelity969694100
E*TRADE95999396
Charles Schwab971009595
Merrill Edge89989399
Interactive Brokers999910093
Firstrade90877569
tastytrade80559284
Ally Invest89777382
Webull76638858
Robinhood74496273
TradeStation94659170
J.P. Morgan
Self-Directed
Investing
78755791
Vanguard88674868
Tradier76467335
eToro54566653
SoFi Invest60415486
Public.com53444653

Source: StockBrokers.com as of January 23, 2024. The overall score is based on the following category weightings: 25% ease of use, 25% mobile trading apps, 20% Commissions and fees, 10% investment options, 10% research, 5% platforms and tools, 5% education.

Interactive Brokers holds the title of “best for professional traders” thanks to its wide range of highly customizable tools, investment options, and research. Investors can also trade in foreign markets and hold multiple currencies, for those interested in forex trading.

While not included in overall scores, StockBrokers.com also rated brokers on their customer service through nationwide phone testing. Fidelity and Merrill Edge are the best stock brokers when it comes to customer service. Both companies answered calls in less than a minute on average, and their representatives had high professionalism. 

Picking the Best Brokerage Account

When you’re choosing from a list of the best stock brokers, you’ll want to consider which features are most important to you.

StockBrokers.com offers clear, in-depth reviews and compares brokers on more than 150 different account features and fees. You can also see screenshots of what various pages look like within the trading platforms. 

Visual Capitalist Logo

See StockBrokers.com’s guide to the best online trading platforms of 2024.

Click for Comments

You may also like

Subscribe

Continue Reading
MSCI Direct Indexing

Subscribe

Popular