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.
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Apple Stock Split
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.
