Apple (AAPL) reported a massive Q2 Earnings and Revenue beat this past 30th of July. That same day they announced a 4:1 stock split, effective August 31st.
Tesla (TSLA) also crushed Earnings and Revenue estimates this past 22nd of July. And just yesterday, Tesla officially announced a 5:1 stock split, also effective on August 31st. So what is a stock split? Why do a stock split? What could it imply?
What is a Stock Split?
A stock split simply converts one share of a company into a specified number of shares. In the case of Apple's announcement, a 4:1 (or 4 to 1) Stock Split, a shareholder will receive 4 shares for every 1 share they hold. And thus the value of one share will equal 1/4 of the value of each share held. Apple closed Post-market today at $440.14. Using $400 per share for simplicity, each share will trade at $100 on Monday, August 31st.
Tesla closed Post-market today at $1,463.23. Using $1,400 per share for simplicity, each share will trade at $280 on Monday, August 31st.
Why do a Stock Split?
A retail investor just starting out may only have $300 to invest with at any given time. So a $400 and up price tag leaves a large Barrier to Entry, making it difficult to afford even one share and invest in a company. Splitting the share price 4:1 would allow an investor to not only begin investing in a company like Apple, but buy 3 whole shares with $300 - whereas before he or she couldn't even afford one share. Employee Stock Options will naturally be cheaper as well and allow for employees to invest more into their own company. With the sum effect allowing for more shares to be purchased on an aggregate, this should naturally drive up the price.Â
There is also the psychology of the numbers. A $280 share price is far less intimidating than a $1,400 plus share price.
Stock Splits generally imply that a company fully expects to do well in the short to mid-term, and longer. It wouldn't make much sense for a Board to vote on a Stock Split, but expect to do poorly in subsequent quarters and see the share price potentially drop from a $400 value (using the Apple example), split to $100 a share, then potentially drop down to $65 or less on poor performance.
Fractional Shares
Then there's the whole idea of Fractional Shares - the purchase of less than one whole share. Historically, Fractional Shares were only available for purchase when a stock position offered Dividends, and those Dividend Payouts were setup to automatically DRIP (Dividend Reinvestment Plan) - more on DRIP in a following post. If your Dividend Payout was $93.33, and one share of that company costs $30 at the time of the payout, you would automatically own 3.11 shares - thus you would own an additional three whole shares, plus a 0.11 fraction of a share.
Mad Money interview with Stockpile Co-founder & CEO, Avi Lele
Courtesy of CNBC
A company called Stockpile (Stockpile.com) came along in 2010 offering the purchase of Fractional Shares. Investors could choose to purchase a specific dollar amount of a stock even if the invested amount was less than the cost of one whole share. They allowed beginner investors to buy shares for themselves, or gift them to others either through email or via a gift card - with a nominal fee. Although this is a private company not known to as many as say TD Ameritrade, this certainly introduced the idea of making investing affordable for small investors (even for children with custodial accounts) with the purchase of Fractional Shares.
Since December of 2019 and on, major brokerages like Fidelity, Schwab, and the relative newcomer Robinhood began offering Fractional Share purchases (on top of their already 0 commission fees). And with Fractional Share purchases now an option, although not with all major brokerages (like TD Ameritrade, E-Trade, many overseas brokerages), will the traditional Stock Split be as beneficial to investors and towards the overall stock performance? We'll soon find out.
Disclaimer: This post represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should conduct their own due diligence and consult their tax and financial advisors before making any investment.
Disclosure: I currently hold a position in: AAPL, TSLA, with the intention of going Long, Long, respectively.
I wrote this post myself, and it expresses my own opinions while sometimes quoting others. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.