On April 15 of this year, a company called ETSY went public offering 111.25 million shares of stock at $16 a share. This produced what in stock parlance is called a market capitalization of 1.78 billion. That means what the world thought ETSY was worth. Once offered to the public it quickly shot to almost $30 a share, doubling its market capitalization. Today, the stock trades below $15.
Sometimes stocks rocket to levels that make them difficult to trade. In 2006 Mastercard went public at just under $40 a share. By 2014, it has risen to more than $800 a share. In order to make the stock more attractive to buyers in January of that year, the company announced a 10:1 split. Thus a person who owned 100 shares of the stock on January 21, 2014, awakened the following morning with 1000 shares. Eureka! Right? Well not really, because when a stock splits, the price is divided commensurate with the split. So the 818.00 closing price on the day before the split was an $81 price the next morning. The market capitalization did not change. The investor was not enriched. Now typically, Mastercard at $81 a share is an easier stock to buy than at $818 but lawyers and clients need to understand that splits do not themselves create value.
There is also something called a reverse stock split. We saw some of these in the wake of the 2008 recession. When a stock plummets so low that buyers start to equate it with a penny stock, discussion turns to pumping up the price by reducing the number of shares. In 2009 the insurer AIG announced a 1:20 split. The AIG owner who went to bed with 200 shares on one night woke up the next day with 10. Again, the market value of the investment is not changed but the stock now has a price that seems more “dignified”. Radio Shack is struggling with this issue as we write this. RSH trades for under 10 cents.
When tracing securities holdings this can be important to know. If husband held 20,000 shares of AIG when he married in 2006, how come he owns only 2,000 today? Dissipation? Transfer to another account to hide the asset. Sometimes a quick check at a website like StockSplitHistory.com can clarify this issue. Some of the on-line market charts will actually reference a split on the chart. But most charts simply adjust the chart as if the split never occurred because it is the most efficient way to show changes in market price over time. We ran into this recently when a client received a securities account that was 10% lower than the date of trial value in a market that rose 3-5% over the corresponding period. As we examined this, two matters became clear. First, husband’s stock in Apple had undergone a 7:1 split in Summer, 2014 and his heavy reliance upon the future of Russian and oil based stocks had wiped out the gains his other investments had experienced.
There are several sites that provide information on stock splits. It is worthwhile to note this tool in valuing a marital estate.