Why a New Wave of Stock Splits Could Be on the Horizon

Throughout most of the stock market's history, stock splits played a vital role in helping companies control share prices. Recently, though, many companies have stopped doing stock splits even when their share price has climbed to extremely high levels. Many investors had concluded that stock splits were becoming a thing of the past, but the most recent move from robotic-surgery pioneer Intuitive Surgical (NASDAQ: ISRG) to do a 3-for-1 split raised hopes that stock splits might finally be back in vogue. In particular, Intuitive Surgical cited a new reason for splitting shares that could apply equally well to a host of other companies that have thus far resisted making similar moves.

Stock splits used to be an extremely common phenomenon among companies. Especially during bull markets, the inexorable upward movement of share prices led most companies to execute stock splits at fairly predictable levels. The $100-per-share mark was an especially common point at which to do stock splits, because triple-digit share prices made it expensive for rank-and-file investors to make trades in round 100-share lots. Companies used to cite retail investor liquidity and ease of trading as a key aspect of doing stock splits.

That largely changed in the 2000s, and two things made the old reasons for splits less appealing. First, the rise of discount brokers made trading in 100-share lots unnecessary. More investors moved toward smaller trades, and for them, it made little difference whether they bought 10 shares of a stock at $90 per share or a single share priced at $900. Meanwhile, some companies liked the idea of keeping their share prices high, in part because it demonstrated their long-term success every single day, and in part because volatility levels among high-priced stocks tended to be less extreme than for lower-priced stocks.

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Source: Fool.com