Is it good if a stock's share price tops $1,000? What Amazon, Alphabet and others show investors.
It's been a big summer for tech companies that start with the letter "A." The stock price for Alphabet, Google's parent company, surpassed $1,000 per share for the first time on Monday, June 3 — less than one week after Amazon accomplished the same feat on May 30.
As of Monday, both stocks had retreated below $1,000, to the mid $900s per share, owing in part to a larger tech-sector pullback; a selloff that started June 9 sent many big technology stocks tumbling, though evidence suggests this might simply be a reversion to the mean (aka a return to more "normal" prices). According to figures provided to Mic by S&P Global Inc., only seven publicly traded U.S. companies have ever crossed the $1,000 per share milestone, for as far back as the company has data.
Indeed, even stocks that cost more than $100 per share were incredibly rare until recently. In 2002, only two stocks were issued at more than $100 per share. Now, the average price of a stock is about $98 per share, per S&P Global. S&P Dow Jones Indices analyst Howard Silverblatt said that there are a few reasons for high stock prices, besides the post-recession recovery: Much has to do with human psychology.
"Traditionally, companies like to keep their stock in a certain area," Silverblatt said. "When Google [went public] at $85 a share, there was a lot of concern on [Wall] Street that it was too high. There were discussions and editorials that $85 was too high. It was all psychological. And that was only 13 years ago."
By "psychological," Silverblatt is referring to the human biases that share prices can trigger. Technically, share price doesn't really tell you anything at all about a company, like how much it is worth, unless you know how many shares are out there. And yet, psychology obviously matters. Ten $10 bills and one $100 bill, for example, are both worth the same amount of money, but there is something kind of gratifying about having a fatter stack of bills in your wallet.
Likewise, Silverblatt said, companies have typically indulged that unconscious preference by keeping stock prices between $50 and $70 per share. "Companies like to keep it in a range where individuals can buy it," he said.
But the bar for what constitutes an affordable share price today may be moving, Silverblatt added. Though it's true only six of the 5,700 or so publicly traded stocks have share prices that high, until 2012 there was only one, and it was kind of a special case: Berkshire Hathaway, the holding company for billionaire Warren Buffett's investments.
As of Monday, the other three with shares still costing more than $1,000 were travel company Priceline, homebuilding and mortgage banking firm NVR and Seaboard, a holding company that owns Butterball Turkey.
How stock prices can manipulate you
There are a couple reasons why companies might want their stock price to seem affordable to everyday people, Silverblatt said. One is loyalty: "The thinking was that shareholders and the individuals that held the stock would hold on to it," he explained. "They were anchors to the stock, as opposed to the institutions, and typically they voted with management."
The other reason, Silverblatt said, has to do with something called liquidity, which is another way of saying that a given asset is easy to both buy and sell. Indeed, some research has found that when you lower the price by increasing the number of shares — known in the industry as a stock split — liquidity does get a boost. That's one reason why one of the most successful tech stocks Apple, has split its shares several times — most recently in 2014, when each $645 share of Apple stock was turned into seven shares worth $92 a pop.
"Splits used to be a mainstream [event]," Silverblatt said. "You got a beeper, and if a company announced a stock split we would send you a notice ... We literally charged you to let you know about a split."
But these splits are disappearing. During the late '90s, there were usually about 100 stock splits each year. There have been two so far in 2017. Why? For one, stock splits are expensive — some studies put the cost as high as $800,000 for a large company.
"When you talk about Amazon, they are considered new technology [for a] new generation, headed by younger management," Silverblatt said. "It’s definitely a slow changing of [the] guard; they’re not [worried] as much about high prices" per share."
Incidentally, that may not be a bad thing. While shareholders love stock splits (since where they once had one share, they get two or more), studies have found splits can lead to fees for investors. In other words, it might be for the best for long-term stock holders — a group that ideally includes retirement savers — that higher stock prices are becoming the norm.
Buffett, the man behind Berkshire Hathaway's $250,000 share price, has long held that high prices discourage speculation. When he finally caved to pressure and began offering watered-down shares in the mid-'90s, he begged people not to buy them, but they did anyway.
Whether or not high share prices deter speculation, there is a way around the many ways that the stock market encourages unconsciously irrational or risky behavior: Instead of trying to choose individual stocks, investors may want to opt for index and exchange-traded funds instead.
These typically come with fewer and lower management fees and track specific industries or the market more generally. They tend to be more diversified and thus less risky than putting all your eggs in one stock "basket." For more advice, check out Mic's guide to investing.
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