Call (NASDAQ: AAPL) en Tesla (NASDAQ: TSLA) have a lot in common. Both companies are innovators who have created demand for their revolutionary products, and both have strong branding and a loyal band of dedicated followers. They also both come with high stock prices, in large part because of these things.
The tech giants also have something else in common: Both announced share splits this month that will substantially reduce the cost of corporate shares. Apple’s 4-for-1 split should bring the price down from the $ 500 per share mark closer to $ 125. Tesla’s 5-for-1 split means you can pay $ 420 per share somewhere instead of the $ 2,100 where it is currently trading (depending on prices when the split happens).
There’s a strong argument to be made that these splits are not really important (I know, because I made it). But there are also two big reasons to believe that they will actually be a benefit to investors. Here’s why.
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1. Increased demand for shares could raise the price
First things first – a share of the stock changes the value of shares of Apple, Tesla, like any other company does not. Stock market splits do not affect how much a stock is worth, and do not affect a company’s market capitalization. When a split occurs, there are simply more shares exceptional, each with a proportionately lower price tag. After all, splitting a $ 100 stock so that you end up with five $ 20 shares is absolutely no different than taking a $ 100 account and splitting it into five $ 20 accounts.
But stock splitting means individual stocks buying less. Historically, this was the driving force behind most corporate decisions to split their shares. If a share costs $ 125 instead of $ 500, more people can buy a share. This can lead to increased demand, which in turn can drive the share price up, although the value of the company has not actually changed.
Theoretically, this should not be a problem anymore, as a growing number of investors now have access to fractional shares. These are what they sound like – fractions of a share available to people who do not have the money to buy in full. While more brokers are currently offering fractional shares, not all do. And some who do, you can not place limit orders for them, which makes it more difficult to buy at your desired price.
A typical investor is unlikely to switch brokers just to gain access to fractional shares so that a split can make the stock even more accessible. Plus, not everyone who is potentially interested in buying an Apple share like Tesla is even aware of the possibility of buying fractional shares. For casual investors who want to buy a few shares, a quick glance at an expensive price per share can deter them before they discover this as an option. That can be a particularly big problem with companies like these being names.
As fractional shares become more widely available and more trusted to investors, this benefit of a share split will become less and less important. But, for now, the fact remains that there will likely be an increase in demand for these shares as their price per share falls after the split.
2. Perceptions do matter
When investors choose stocks, they are soene do their research to assess whether the share price is worth paying. After all, a stock with a high price per share is a bargain if it has strong growth potential, while one trade for only a few dollars is too expensive if the company is in trouble and the price per share falls quickly.
But most investors are not 100% rational, and far too many retail investors often judge whether a stock is “expensive” based on the price of a stock. In fact, a look at Robinhood investment services most popular stocks shows that many of the platform’s investors (who are often younger and less experienced) flock to well-known tech stocks rather than stocks that trade at $ 10 per share. or less. Many of these companies with stock prices below $ 10 are not great, but inexperienced investors can only look at them because they do not cost much to buy.
For many investors looking for “cheap” deals, a high stock price can deter them from buying shares for hundreds or thousands of dollars – even if they can buy fractional shares for only a few dollars. It just the body expensive, if they exchange price for value.
And for the many “irrational” investors out there, owning a fractional share often just doesn’t seem as attractive as owning a full share – although in reality there is no difference and they will both have potential make profits. In other words, the fact that people can only buy a 0.25 share from, for example, Apple, may be enough to convince them not to buy at all, while they would like to pay $ 125 for one full share.
Of course, no one wants to think of themselves as an irrational investor. But the fact is that many people’s conscious prejudices often shape their financial decisions – sometimes to their detriment. Companies know this and are aware of it, by lowering their share price to look as a better option for investors, even if absolutely nothing has changed.
So, do the shares of Apple and Tesla matter?
While I stand by my position that Apple’s and Tesla’s split would not have to case for investors, they can totally.
The fact that the share prices of Apple and Tesla have both been up since the announcements of their split shows that they are still having an effect, at least in the short term. Of course, if fractional stock trading catches on, investors in the future may not see the bump in stock price that Apple and Tesla owners currently enjoy.
