Taking Stock of Stock
20-for-1 Split?! Say what?
I first wrote this primer on the attributes of stock last November. However, with the recent announcements of two of America’s largest tech companies announcing 20-for-1 stock splits, I have been getting more questions from those wanting to understand it better. So, let’s have a re-read – hope you enjoy it!
Let’s take stock of stock!
There has been much in the headlines about inflation, and we’ve been feeling its effects in different ways this year. Usually, these headlines just focus on the pains of inflation and can leave one with the feeling there is nothing one can do about it. I’m a fan of being proactive and knowing what can counter ill effects.
One of the best ways to address inflation is through growth. In simple terms, if the money in your wallet is being hit by higher prices for the same stuff you need, it helps you still get what you need if you have more money in your wallet. The tendency of fear immobilizing us can lead one to turn to conservative measures like maintaining large savings deposits. But if the bank is paying interest rates well below what the trending rate of inflation is, your pile of cash is falling behind in spending power.
Stocks are not appropriate investments for everyone depending on what a person’s aversion to risk is and their financial situation. A company can be caught being a bad actor and lose its right to continue as a company – i.e. go bust, leaving the stockholder with valueless shares. However, of the many types of investments out there, stocks can be a very effective tool in combating inflation. Assuming one has already done the prudent step of maintaining an emergency fund, holding the shares of companies that put their business acumen into growing the value of their business enables the shareholder – the one owning stock in their company – to let their investing dollars ride their growth. If you buy a share of stock at $500 for that share and a few years later it is worth $900/share, your spending power has increased faster than the rate of inflation, thereby keeping you ahead of it.
Another attribute unique to owning common shares of stock is that the company you own shares in may announce that they are spinning off a division of their company to trade under its own stock ticker symbol. This is akin to participating in an IPO (Initial Public Offering) of a new company yet not having to use your money to buy shares or do the initial subscription lottery to be able to buy those shares. It is a very efficient process where the number of shares you own in the parent company will determine how many shares of the new company you will be gifted and they will drop into your investment account. Your initial money invested now has a chance to grow under two different company stock tickers. That’s what I call amplification of your money and combating the effects of inflation.
One other possible benefit of owning common stock is that the shares may split while the value of the company continues to grow. When a stock splits, it does reduce the share price of each – for instance, a stock worth $100/share that goes through a 5-for-1 split, each share will now be worth $20/share after the split. But if you own 100 shares at the time of the split, you now own 500 shares. If that company continues to grow in value, you own that many more shares to grow along with it. Again, your money has found yet another way to grow ahead of inflation.
These are all attributes unique to common stock. When you look at the wide selection of investment types to choose from and understand their attributes, you may see the benefit of having a diversity of investments that serve different purposes in your investment portfolio. One of the ways I aim to serve my clients well is by helping them discern when it is time to realize some of the gains that have grown, lock it in, and plant new shoots to grow once again in their portfolio. Stocks do not need to be viewed as a trip to the casino or a get-rich-quick scheme. They can be viewed for their attributes and invited to be part of a healthy investment portfolio for their unique characteristics.