Tuesday, November 10, 2009

Stock Splits

Remember yesterday's post on the acqusition of Burlington Northern Santa Fe by Warren Buffett yesterday?


Simultaneously, Warren Buffett has decide to stock split his B shares 50-1.




If you own 10 Berkshire B shares, for example, your investment is worth $33,950 using Thursday's price. If the 50-1 split took place Friday morning, you'd simply own 500 shares that each have a price of $67.90 -- still $33,950.

In layman terms, This means that the 1 B share you are holding on to now, is being split into 50 small B shares. However, there is simply no difference in the worth between 1 big B share and the soon-to-be 50 small B shares.


Let's take Googles share prices as a reference, $548.65. And Berkshire Hathway's is now $67.90 (from $3,395)


This might sound puzzling to some of you. Why does Warren Buffett split up his shares at this point in time? Is he trying to make it easier for more people out there to buy his shares?


The answer is a BIG no-no. Warren Buffett has always and will always be a long-term investor, he will never succumb to short-term gains. So why is he doing this then?




Reason: Buffett said that the reason for the split was to avoid socking smaller shareholders of Burlington with a big tax hit once they received Berkshire stock.


This makes a lot of sense because the share prices of Berkshire stock is extremely high and thus these people who received it as part of the acqusition will be taxed heavily and they might not be able to cope with it.


Then again, I believe that even if the reason for the split is to attract more investors, there is still nothing wrong with it. It might seems like a short-term goal, trying to attract more small investors but I see it the other way wrong.


For me, I feel that if you attract sufficient amont of small investors, their total investments can jolly well surpass the total investments made by the few big investors. Now that Berkshire Hathway is in the spotlight in the stock market, everyone wants to ride on its coattail but they can't because they cannot afford the exorbitant price of the shares. However, things have changed now, almost anyone in the world can actually afford to buy the shares. Come to think of it, the long-term investors will still stay since they still retain the similiar worth of their investments, just in a larger amount of shares now. Adding on to that are a new set of small investors, who are willing to push up the price of the stock. It's really a Win-Win situation when you think about it.

Hence, I believe that in the long run, the stock prices will hit 3-digit any time soon, and there is no problem to that at all!

Credits -investorbuddy, -cnn, -legis

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