Is this a reason enough to buy Apple or Tesla shares?
Apple announced their 4 for 1 stock split last week and as I started to write about it, Tesla announced their 5 for 1 stock split as of this Tuesday as well! Perfect, let’s kill those 2 birds in one blog post!
What is a Stock split?
The finance world likes to have its own jargon (think of IPOs, hedge funds, tax-deferred accounts, credit default swaps,…you name it) and to the outsider, it can sound so complicated while in reality most of the terms can be explained in simple terms to the common man (you and me). So what is a stock split to start with?
A stock split happens when a publicly listed company such as Apple or Tesla decides to increase the number of shares outstanding. In the case of Apple, the 4 for 1 means that Apple shareholders will obtain 3 additional shares per owned share (making that 4 shares instead of 1), and in the case of Tesla, 4 additional shares per owned share (so 5 instead of 1).
Does that mean that every Apple or Tesla shareholder will become 4 times and respectively 5 times “richer”? If that is what you were hoping for I am sorry, nothing changes in terms of total value because the share price will be divided accordingly. Today, a share of Tesla stock is roughly $1600 (I use round numbers for simplicity), if it keeps that same share price at the time of the stock split planned on the 31st of August, each share will be worth $320. For Apple, the stock split is due on the 24th of August, and at the current price of $450, this means the share price will be worth $112,5.
See it as replacing a 100 dollar note with five 20 dollar notes. You still have 100 dollars in your wallet. Here is a more yummy illustration
Pizza makes the concept easier to digest, don’t you agree? (pun absolutely intended)
From a broader perspective, the total market capitalization of the company (#shares outstanding * current market share price) will remain unchanged as well.
For Tesla, there are currently 186,36 million shares at $1600 –> Market cap = 298 billion USD, assuming no share price change, which means that we will have 931,8 million shares at $320.
For Apple, there are currently 4,276 billion shares at $450 –> Market cap = 1,924 trillion USD. Assuming no share price change, we will end up at 17,104 billion shares at $112,5.
Why Do Companies split their stocks?
Now, you might wonder, what is the point of all this? Stock splits usually happen when the stock price has increased significantly over time.
The main goal of this operation is to increase the liquidity on the markets, the shares can be exchanged more easily (it is easier for more people to trade and exchange $320 shares than $1600 shares).
Think of liquidity as water, the more liquid a market, the more the transactions are happening and the more money flows or change hands.
The companies are looking at attracting new retail investors who were left out due to the high share prices and this leads to increased interest (you will see sharp price increases in the coming days).
What does it mean to you as an investor?
Understanding stock splits are part of an intelligent investor’s knowledge arsenal so it is essential to know what is going on, nevertheless for current shareholders, nothing. changes in terms of taxation nor portfolio value.
Is a stock split a good sign to buy those shares? It definitely signals a positive trend and future growth for the stock in general. It is to be expected that a short spike in price will occur due to increased interest from a broader range of investors.
Now before you “open your wallet”, remember that as for any investments you will need to conduct your own due diligence. Just because Tesla or Apple shares can be accessed more easily, it does not change the companies’ business model, how they make money and it certainly does not affect their growth potential. Buy shares if you have gone through the numbers, have studied the industry, and believe in their growth perspectives (and if you can handle the share price variations depending on Elon’s Tweets 😂).
If you liked this article, do follow us on social media as well for more great content, check our Facebook, Instagram, Twitter, and join our e-mail list. I would love to connect with you!
Disclaimer: Although I hold a degree as a MSc in Business Engineering and am passionate about personal finance, I am not a licensed financial advisor. Investing in the stock markets bears risks so always consult with a professional before making any investment decision. The contents on this site are for informational, educational, and entertainment purposes only and do not constitute financial, accounting, or legal advice.
You really broke down the concept of stock splits so clearly! I first encountered a stock split with a stock that I had in my portfolio when I was around 20 years old. I had no clue what was going on and spent a whole afternoon reading and trying to understand what had happened! The pizza concept was certainly much easier to digest!
Glad it helped Kat, I had heard of the Apple stock splits before but was not sure neither what that meant and then I realized hey, it is not that complicated at all actually! And indeed, Isn’t pizza wonderful?