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 and Tesla decide to increase the numbers of shares outstanding. In the case 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 current price of $450, this means the share price will be worth $112,5.
See it as replacing a 100 dollar note by five 20 dollar notes. You still have 100 dollar 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, never the less 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 makes 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 😂).
Disclaimer: Although I hold a degree as 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.