Why Are Some Shares Priced Higher Than Others?

Why are some shares priced higher than others? The answer can be found in stock splits—or conversely, a lack thereof.

The majority of public companies opt to use stock splits at one point or another, increasing the number of shares outstanding by a certain factor (e.g., by a factor of two in a 2-1 split) and decreasing their share price by the same factor. By doing so, a company can keep its shares in a price range that doesn't look too expensive to investors.

Most publicly traded companies keep their share price below $100. The reason is largely to maintain a price range, which ensures ample liquidity even as the company increases in value. If a company splits its shares every time it breaches the $100 mark, investors will always be able to buy the stock at a "cheap" price no matter how large the company becomes.

Real-World Examples

A tenacious growth stock since its inception, software giant Microsoft (MSFT) provides a prime example of consistent stock splitting used to maintain a trading range. Since 1987, MSFT has split nine times.

But every time the stock split, its price was lowered, and its number of shares doubled.

To compare the actual price of Microsoft today—$308 per share—to 1987, we need to use a split-adjusted price which removes the effects of the nine splits. When we do this, we find Microsoft's 1987 split-adjusted price is only about $0.08 per share. This means that Microsoft shares today are worth more than 3,500 times what they were worth in 1987.

On the flip side, there are a few companies that don't use stock splits. Warren Buffett's holding company, Berkshire Hathaway, is the most prominent example.

Since Buffett came to control the firm, its stock has never split, even as the price-per-share has grown incredibly since the 1960s. Unlike Microsoft, Berkshire Hathaway's stock was already trading at more than $8,000 a share by the late '80s. Today, Berkshire Hathaway Class A (BRK.A) shares trade at a whopping price of more than $500,000 per share.

Relative Value is What's Important

Whether a stock is trading at $1,000 per share or $1 per share, we can get a sense of its value by comparing its price to its projected earnings.

Today (April 2022), BRK.A has a forward P/E ratio of 26.4, while MSFT has a forward P/E of 29.1. By this measure, BRK.A shares—even at a mind-boggling price of more than half a million dollars per share—are actually less expensive than MSFT shares, in relative terms.

Article Sources
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  1. Yahoo! Finance. "BRK.A."

  2. Yahoo! Finance. "MSFT."

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