In August 2020 Apple and Tesla announced stock splits. Both stocks have shot up in price after the announcement. Want to know how this impacts you or how to deal with stock splits for any stock in your portfolio, stay tuned!
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What is a stock split?
A stock split increases the number of shares in a company. Stocks are typically split when the stock price gets so high that it becomes out of reach for small investors.
Does a stock split impact my return?
I’m sorry to say that if you thought that stock splits doubled your return that is unfortunately not the case. The total value of your stake in a business will not change. The only thing will be different is the amount of shares you own. This means that there will be more shares in circulation at the same market capitalization.
Is a stock split a good sign?
Yes, a stock split is typically a good sign. It means that the company is confident that the stock price will continue to go up. They are providing more opportunity for investors to buy into the stock.
It is a good thing for smaller investors because the price is not as much of a barrier to entry. Diversification is an important component of any investing portfolio. The larger the price of one stock, the harder it is to spread your money across different stocks in different industries.
I have an investing plan that I follow when purchasing investments. I try not to let any particular stock be more than a 10% stake in my portfolio. This is difficult to manage when you have expensive stocks in your portfolio. It also exposes you to more risk if by being over exposed to a particular stock or industry if there is an economic downturn.
What do I need to do when the stock splits?
When a stock splits your broker will typically handle everything. You should receive a notification from your broker prior to the split providing details on the change. There is no paperwork that you need to do on your end. Once the company announces the official day of the change the will be made as of the stock price on that day.
Apple announced on July 30 that they will be doing a four for one split on August 31. In a hypothetical scenario if APPL cost $400, the new price would be $100. This will be the fifth time Apple has split their stock.
APPL Stock Split History
-1987 – Two for one basis split. The stock price before the split was $79.
-2000 – Two for one basis split. The stock price before the split was $111.
-2005 – Two for one basis split. The stock price before the split was $90.
-2014 – Seven for one basis split. The stock price before the split was $656.
The stock splits in 1987, 2000, and 2005 were due to Apple wanting to make the stock more affordable. In 2014 Apple’s stock split was strongly correlated with its entry into the Dow Jones Industrial Average. Apple has implied that they are splitting their so that smaller investors have a better opportunity to invest in the company
Tesla Stock Split
Tesla (TSLA) announced a five to one stock split. In many ways Tesla is still working to prove its valuation in comparison to their competitors. Their stock price is strongly correlated with the compelling story in the company.
Tesla is one of the most shorted stocks on the market. If you are a short term investor, the announcement of the stock split isn’t good news. Investors that are long on Tesla should see this as a good sign for the future.
Wrap Up
Now that Apple and Tesla are doing stock splits, other companies are looking into completing stock splits. It should be interesting to see what companies decide to do in the future.
Other companies that have done stock splits over time include Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Disney (DIS), Johnson & Johnson (JNJ), Proctor & Gamble (PG), JP Morgan Chase (JPM), Visa (V), and many more. Knowing if a stock has split can bring a lot more context to understanding the price.
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
A stock split is a decision by a company's board to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion. Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits.
A stock split isn't worthless and it doesn't impact a company's fundamental position. It will therefore not create additional value. Some compare a stock split to cutting a piece of cake. If the dessert tastes horrible, it doesn't matter whether it has been cut into 10 pieces or 20 pieces.
The short answer is it doesn't matter, and here's why. As mentioned earlier, a stock split doesn't change the value of the company or the value of an investor's holding. If you buy one share today or 10 shares after the split, you'll be investing the same amount of cash.
In a stock split, a company divides its existing stock into multiple shares to boost liquidity. Companies may also do stock splits to make share prices more attractive. For shareholders, the total dollar value of their investment remains the same because the split doesn't add real value.
Is It Better to Own a Stock Before or After a Split? It doesn't matter if you own a stock before or after a split because the value won't change. A stock split is purely a mathematical decision that does not reflect the valuation of a company. If a company is going to perform well, it will before or after a split.
From time to time, stock splits are followed by a bump in stock performance—but not always. Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices.
Another one of the main stock split benefits is that the shares of a company generally see increased liquidity. Since shares have now become more accessible to retail investors, more people would show increased demand for it, which can increase liquidity in the counter.
A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not.
Unlike issuing new shares, a stock split does not dilute the ownership interests of existing shareholders. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two-for-one stock split, you will own 200 shares at $50 per share immediately after the split.
One way is to buy shares of the company before the reverse split occurs with the plan to sell them soon afterwards. This can be profitable if the company's stock price increases after the split. Another way to make money from a reverse stock split is to short sell the stock of the company.
Stock splits come in multiple forms, but the most common are 2-for-1, 3-for-2 or 3-for-1 splits. For example, let's say you owned 10 shares of a stock trading at $100. In a 2-for-1 split, the company would give you two shares with a market-adjusted worth of $50 for every one share you own, leaving you with 20 shares.
You have two basic options. You can buy the shares beforehand while the price per share remains high. You will likely hope to profit from a rise in the share value with the excitement surrounding the stock. You can also elect to wait until after the split and then take advantage of the lower price per share.
Stock splits vs. stock spinoffs. One reason why there are fewer splits now than in 2000 has to do with the way retail investing has shifted. Back in 2000, broad-market index funds were relatively small factors and retail investors typically bought shares of individual companies.
Before indulging in a stock split, a company must understand the risks and challenges. A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before.
A stock split doesn't change the value of your investment. If you own the stock of a company that executes a stock split, the details of your position change, but the total value of your position does not. Here are the key things to know about stock splits.
Some companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige. A company trading at $1,000 per share, for example, will be perceived as more valuable even though the firm's market capitalization may be the same as a company whose shares trade at $50.
While a split doesn't actually make your investment any more valuable in and of itself, a lower share price and the resulting increase in trading liquidity can certainly attract additional investors.
Introduction: My name is Eusebia Nader, I am a encouraging, brainy, lively, nice, famous, healthy, clever person who loves writing and wants to share my knowledge and understanding with you.
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