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Understanding Stock Splits

By:Dr. Jim Schultz

Costco and Chipotle are candidates. Here is what you need to know.

  • With a stock split, there is technically no change in value for the investor, as one share of $500 is worth the same as 10 shares of $50.
  • However, the market has reliably responded so favorably to stock splits over the years, that it’s difficult to perceive them as anything less than extremely positive news.
  • In today’s market, a case could be made that both Costco and Chipotle could be considering stock splits in the near-term future.

Stock splits have always been one of the most interesting phenomena of financial markets. 

While it’s easy to see there is no change in the value of a stock position pre-split versus post-split (i.e. 1 share worth $500 has an identical value with 10 shares worth $50 each), stock splits have been one of the most reliable catalysts out there to almost assuredly propel a stock to new highs. 

Case in point, Apple (AAPL), a company that could easily make its case as the most successful company of the previous two decades, has split its stock three times in the last 20 years:

  • 2:1 in 2005
  • 7:1 in 2014
  • 4:1 in 2020

With the value of the company having soared to well over one trillion dollars during that time. This example, along with many others like it, shows that investing in a stock prior to a stock split is about as close to sure thing as you may ever find in the stock market.

Stock-split candidates

Which company will split its stock next?

While it’s nearly impossible to accurately predict a corporate action like a stock split, generally speaking, the only time a stock split is even considered as an option on the table is an unusually high stock price—one that effectively crowds out the average investor. Most companies want to keep their stock prices at a level that encourages demand from any willing market participant.

Therefore, without being privy to all the conversations behind closed doors between members of upper management, in today’s market, both Costco (COST ~$550/share) and Chipotle Mexican Grill (CMG ~$2,000/share) could be candidates for a stock split in the near-term.

While some companies actually prefer to keep their stock prices so high that the average investor is effectively excluded from ownership, the incredibly favorable response that the market has shown to stock splits for many, many decades could make this an option for these two companies.

Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. He hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3

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