What’s A Stock Split And How It Could Affect Your Current Holdings
Apple (AAPL Stock Report) and Tesla (TSLA Stock Report), arguably two of the hottest companies on Wall Street, both announced stock splits in recent weeks. The question is, can it positively affect your current holdings? First, let’s understand what a stock split is. Essentially, a stock split is exactly what it sounds like. One share is splitting up into a few individual shares. This often comes after a particular share price has been inflated to a level that may be ‘too high’. For example, in Tesla 5-for-1 stock split example, one share worth $1500 now will be broken into 5 shares worth $300 each. This way, it will lower the entry barrier for investors who wish to buy a stake in the company.
A stock split can typically result in a share price increase following a decrease immediately after the split. Since many retail investors find the stock now more affordable, they end up boosting demand and driving up prices. A stock split also reminds investors that the share price had been increasing in the past. It is not surprising that many investors extrapolate the historical growth into the future and bid up the share price again. One thing to also note is that even though the number of outstanding shares increases and stock price decreases, the market capitalization doesn’t change.
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Who Tend To Benefit From Stock Splits?
Generally speaking, stock splits are neutral events for current shareholders. In the case of the Apple 4-for-1 stock split, you used to own 1 stock, but moving forward you will own 4, but the total value remains the same. Essentially, a stock split wouldn’t change the company value, all else being equal. But the truth is, all else is rarely equal when we apply it in the market.
Both TSLA stock and AAPL stock jumped after the announcement. This may be the fifth time for Apple to do a stock split, but it is Tesla’s first. The price change will be more dramatic for Tesla, whose stock split will bring individual share to the $300 range. Compared to Apple’s post-split of $100 range, Tesla’s post-split stock might find it harder to attract smaller investors.
Certain online brokerages offer investors to buy fractional stocks. Conceptually, it offers the same thing in the absence of stock splits. Then again, not all brokerages will offer such services and it’s not that easy to move shares between brokerages. Therefore, it will not create a much stronger demand than actual stock splits. Now, like it or not, news of stock splits tend to cause share prices to jump. And that is not really rational. But who cares? As long as the prices go up, existing shareholders would not be complaining.
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Tesla & Apple’s Stock Splits Could Restart The Trend Again.
Is stock splits a thing in the past? Tracing back the history, in 1997, 102 companies in the S&P 500 split their stocks, and in 2016, only 7 companies did so, a decline of more than 90%. That is about to change when two of the hottest tech companies announced they will be splitting their shares at the end of this month. The zero brokerage fees environment gives companies a greater incentive to split shares today. In addition, it creates a more affordable and accessible stock for Robinhood traders to start trading. After all, many retail investors are nonetheless still prone to judging how “expensive” a stock is based on its dollar value. That said, it is not surprising to see other tech companies like Amazon (AMZN Stock Report), Shopify (SHOP Stock Report) or Alphabet (GOOGL Stock Report) make such moves in their own timeline.