If you’re paying attention to financial news, you’ve probably seen all the discussion about both lately Call (NASDAQ: AAPL) en Tesla (NASDAQ: TSLA) scheduling stock splits in the near future Apple splits its stock 4-for-1, while Tesla does a 5-for-1 split.
When a share splits, investors receive multiple shares for each share they own, and the share price is reduced because more shares are now exceptional. In the case of a split from Apple, you get three extra shares for each of your current ones, while in Tesla’s case you get four extra shares. However, the split does not change the value of your holdings, nor does the market capitalization (the total market value of all the issued shares) change.
For companies, however, there are a few reasons to share – but one of the biggest and most important reasons does not really matter anymore. Here’s why.
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Why stocks need to share more for investors
Companies traditionally trade stocks for one simple reason: To make shares of their stock cheaper. After all, the only things that change when a split happens are the price of a single share and the number of shares that current shareholders have.
Companies aim to reduce the prices of their shares by splitting so that shares are cheaper for investors. They calculate that if the company’s shares sell for $ 5,000, the pool of potential buyers will be severely curtailed because many investors simply do not have enough money to pay that much for one part of one share. By reducing the price of the shares, more people can earn them to buy them. Cheaper stocks are also more attractive because investors do not have to make such an enormous commitment for one company (which makes it harder for them to follow their recommendations to build diversified portfolios that can reduce their investment risk).
The companies that split their shares only to reduce the cost to investors may not need to take this step anymore. This is because of fractional shares, which are now being offered as a trading option by a growing number of big-name brokers. This option allows people to buy share shares (as little as .001 of a share with some brokers). Investors can now specify the dollar amount they want to invest in a company, instead of the number of shares to buy, so that they do not shy away from what expensive shares like Apple or Tesla might look like.
Take Apple, for example. If it traded at $ 500 per share on the day of the stock split, a 4-1 split would mean that the share price would go up to $ 125 per share. That an investor with only $ 125 could now pay a full share. But that same investor does not have to wait for the split – instead, they could take $ 125 the day before and buy 0.25 of a stock (assuming it then trades at $ 500). The stock would split the next day, they would end up with one full share worth $ 125, and they would be in exactly the same place.
This is great news for investors, because it means that splits really do not matter anymore – you do not have to wait and hope that your favorite company with a high share price splits its share before you can buy. It also means that companies may be less inclined to split their shares (although some may still do so, as it makes these shares better candidates for inclusion in price-weighted indices such as the Dow Jones industrial average).
And while stock quotes have historically had a positive effect on stock prices simply because they opened a stock to a wider pool of investors, so stock prices are going up as a result of increased demand, this is less likely to happen since those stocks are now available for anyone to buy anyway. Since a split should no longer serve as a positive catalyst that drives the share price higher, this is yet another reason that investors should not worry if one occurs.
So if you hope Amazon shares to split next, or too happy for splits from Apple and Tesla to make shares of these shares accessible to you, there is good news: You do not have to worry about this. If you want to buy into these companies or other expensive stocks – and you have done your research – you can do so today by simply buying fractional stocks based on what amount you have to invest.
