Microsoft’s Mitosis – an introduction to stock splitting
Recently, Microsoft’s (NASDAQ: MSFT) stock has been the highest since 2009. Naturally I began reading up on the company’s history, share price etc. Something I came across which I thought might interest our members – particularly those trying their hand at trading for the first time – was Microsoft’s stock split timeline. This is because if you had purchased a single share in the tech giant 30 years ago, you would have 288 today.
Almost a decade after it was founded, Microsoft filed their initial public stock offering in 1986, raising $61 million for a company now worth over $200 billion. Since their IPO – in which 2.5 million shares had traded hands by close of the first day – the company has undertaken nine stock splits..
At the time, Bill Gate’s take on the notion of going public was lukewarm at best. When asked about the IPO he replied, ‘‘the whole process looked like a pain, and an on going pain once you’re public. People get confused because the stock price doesn’t reflect your financial performance. And to have a stock trader call up the chief executive and ask him questions is uneconomic – the ball bearings shouldn’t be asking the driver about the grease.”
But they went public nevertheless, and proceeded to engage in what Gates may have deemed an “uneconomic” administrative process of splitting stock – nine times no less.
Stock splitting at a glance
Publicly traded companies have a set number of shares that are outstanding on the stock market – the shares we buy and sell. In order to increase the number of shares available for trading, the board of directors may decide to initiate a stock split.
As straightforward as it sounds, a stock split essentially divides each share into more shares. This does not change the position of shareholders post the split, but results in them having more shares of lower value than before (with an unchanged combined value).
Here’s an example. Typical stock splits are 2 for 1 and 3 for 2. For example, in a 2 for 1 split, your 100 shares of $5 each now become 200 shares of $2,50 each – you get 2 shares for every 1 you possess. In a 3 for 2 split, they become 150 shares of $3,33 each.
Is stock splitting beneficial to the shareholder?
At face value no – since a shareholder’s overall standing remains exactly the same. But sometimes a side effect of the stock split may positively impact on the share price. Often, the share price may rise directly after a split since smaller players now have an opportunity to buy-in at a lower price.
Stock splitting may occur for any number of reasons, but it is not uncommon for a company to initiate a stock split when their share price continues gaining in strength. This is to ensure smaller investors are not boxed out, and also to maintain a similar share price with other players in the industry. Between 1987 and 2003 Microsoft split stock nine times, with seven 2 for 1 splits and two 3 for 2 splits.
Regardless of whether shareholders’ actual value in shares grew or not, saying you hold 288 000 shares in Microsoft certainly sounds a whole lot more impressive than a measly 1000.
Check out our trends page and look for steadily increasing stock prices. If prices start soaring past their peers, a stock split may be in the cards.