Warrent Buffett, chairman and chief executive of Berkshire Hathaway commented in
ID: 2759699 • Letter: W
Question
Warrent Buffett, chairman and chief executive of Berkshire Hathaway commented in Berkshire's 1983 annual report: "We are often asked why Berkshire does not split its stock.... we want shareholders who think to themselves as business owners with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices." In its 40-year history, Berkshire Harthaway has never split its stock.
a) What are the consequences of not having done any stock split?
b) Was there any way to buy a fraction of such expensive stock before 1996?
c) In February 1996 Berkshire Harthaway created a second class of stock (the Class B shares). How did it work and what was the reason of such corporate action?
Explanation / Answer
1) When company performs very well, the price of such share will be increased and consequently the trading volume of such share will be decreased as the investor have liquidity crunch to buy such shares.
2) Fractional shares can be created in a situation where a company has a 3-for-2 stock split. Suppose you have three shares of XYZ Corp. and XYZ has a 3-for-2 stock split. In this case, you should get an extra 1.5 shares, which would be 4.5 shares total. Normally, you can't buy half a share in the stock market, but in this case, you could end up with a fractional share.
However, we can buy fraction stock through index fund.
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