What are stocks and shares? How do they work? How did they arise historically?

3. Fractional shares.

Another variant is the opportunity offered by some investment platforms to buy fractional shares. In other words, to acquire not a whole share, but just a part of it. Fractional shares are intended for assets trading at very high prices, where the stock, as in the case of Berkshire Hathaway Inc, Lindt & Sprungli AG or NVR Incorporated, sells for several thousand euros, an amount that is not affordable for all potential investors.

As finance expert Ismael de la Cruz explains, “The bad news is that not all brokers currently allow buying fractions of shares. Over time, it will end up being a generalized practice, but it isn’t at present.”

Cruz says that some platforms make it possible to become a shareholder of one of the lower-priced companies at a more affordable price, which also favors diversification, since the money saved by choosing a fractional share instead of a full share can be invested in other securities.

4. Stock splits.

Indirectly associated with this possibility is the increasingly common practice at some companies of conducting a ‘stock split.’ The company increases its number of shares by multiplying them by a certain number and, consequently, dividing the value of each original share in the same proportion.

Innovative companies such as Tesla, Nvidia, Amazon, Alphabet (Google) and Apple have made use of this mechanism, which provides higher liquidity to the company’s assets, thus improving trading volumes and preventing individual shares from reaching such high market prices that they are potentially a deterrent.

A stock split is, in short, a division of the company’s shareholding, designed to attract new investors. It has a neutral effect on the existing shareholders: if, for example, a shareholder becomes the owner of three times the number of shares, these will have their market price divided by three and will continue to represent the same percentage of the company’s total capital stock.

Apple is perhaps the most striking example: it had already made a 2-for-1 split in 1987 and repeated the transaction in 2000 and 2005. In 2007, Apple opted for a 7-for-1 split to bring the value of the individual share below the $100 barrier, which at the time was seen as a potential deterrent. Finally, in 2020, the number of Apple shares multiplied yet again, this time by four.

As Niall Ferguson would say, if the East India Company were still in existence, by now its number of shares would have multiplied many times over.