Warren Buffett recently announced that the Class B shares of Berkshire Hathaway are going through a 50 to 1 stock split, which is the first time he has split Berkshire stock – something he has claimed for years he wouldn’t do. Buffett has stated multiple times that he prefers not to split stocks because the higher prices make it less likely that day traders will cause major price fluctuations. He changed his mind this week though, after Berkshire’s acquisition railroad company Burlington Northern Santa Fe for a mix of cash and stock. Splitting the stock was a byproduct of the deal and was done for tax reasons.
What is a stock split?
A stock split is just what it sounds like – the stock is split into multiple parts. It actually doesn’t change the overall value of the stock, just the number of shares. For example, if you have a $100 stock and the company does a 2 to 1 stock split, then the original share is now two shares valued at $50 each, which still equals $100. But in the case of the BRK.B stock, it is a $3,425 stock (Friday’s closing price) being split into 50 shares, valued at $68.50 each. (As an interesting note, the Class A share of Berkshire trades for over $100,000).
This shouldn’t change the overall value of the shares, but it will make it much easier for the average investor to purchase shares of the Berkshire B stock, as not everyone can come up with $3,400 to purchase one share. But when the stock splits on Tuesday, people will be able to pick up shares for less than $100, which makes it easier for the average investor to purchase shares.*
*Partial share investing. Some online brokers, including ShareBuilder and a few others, offer investors the opportunity to purchase partial shares of stock, so in the case of BRKB, one could have already been making purchases of partial shares before the stock split. However, not all brokerages offer this.
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