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A Visual Guide to Stock Splits

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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.

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Investor Education

Which Climate Metrics Suit Your Investment Goals Best?

When selecting climate metrics, it is important to consider your purpose, the applicability and acceptability of the climate strategy, and the availability of historical data.

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Which Climate Metrics Suit You Best? MSCI

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The following content is sponsored by MSCI

Which Climate Metrics Suit Your Investment Goals Best?

According to PwC, 44% of investors believe that companies should prioritize reducing greenhouse gas emissions across their own operations and supply chain.

In this graphic from our sponsor, MSCI, we break down climate metrics and provide valuable insights to help build sustainability-aligned portfolios without the fear of falling for greenwashing.

Essential Climate Metrics for Investors

Here are some widely-used climate metrics, as categorized by MSCI:

Climate MetricDescription
#1Carbon Emissions EVIC IntensityMeasures greenhouse gas emissions per $1 million of financing.
#2Potential Carbon EmissionsEstimates emissions from fossil fuel reserves owned by a company.
#3Implied Temperature Rise (ITR)Assesses alignment with global warming scenarios.
#4Carbon Emissions Revenue IntensityQuantifies emissions per $1 million of revenue.
#5Fossil Fuel RevenueDetermines revenue percentage from fossil fuel-related activities.
#6Cleantech RevenueDetermines revenue percentage from environmental and climate opportunities.
#7Low Carbon Transition (LCT) ScoreEvaluates a company’s exposure to climate transition opportunities.
#8Transition Climate VaRAssesses costs from carbon pricing and low-carbon opportunities.
#9Physical Climate VaREvaluates costs from increased exposure to physical hazards.

Choosing the Right Metrics

Climate investing requires selecting the right measurement tools. For that, it is important to consider your purpose, the applicability, and acceptability of the climate strategy, and the availability of historical data for analysis, among other factors. The infographic above contains a flowchart designed to guide you through several key questions.

For example, do you want to:

  1. Measure your portfolio’s impact on the climate or the climate’s impact on your portfolio?
  2. Analyze present or forward-looking data?
  3. Assess direct impact or indirect impact via supply chains?
  4. Evaluate potential future emissions or projected temperature rise?
  5. Focus on climate risks or opportunities?

MSCI’s climate metrics toolkit can help investors confidently measure, manage, and report their climate risks and opportunities.

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Download MSCI’s climate metrics toolkit now.

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