Two weeks ago was America’s largest American maker, Apple Inc. (NASDAQ: AAPL), announced a 4-for-1 action split that will be executed in late August. Apple said it was pulling the trigger… to attract new investors“Shortly after delivering a blowout quarter, its $ 26.4 billion iPhone sales surpassed analysts’ expectations by $ 4 billion.
Maybe not just by chance, two days ago, leading EV manufacturer, Tesla Inc. (NASDAQ: TSLA), also announced that its board had approved a five-for-one split of its shares “…to make shareholders more accessible to employees and investors “. Tesla shares will be split on August 21st.
And now Wall Street is of the opinion that the very unusual move by two tech heavyweights to split their shares within weeks of each other could lead to other tech giants down this path, especially considering the parabolic rally in tech / EV names in the past months.
Apple and Tesla enjoy their best runes in a decade, with AAPL up 126% year over year to date, while TSLA has a whopping 580% rally over a similar time frame.
Why split?
A share split is a decision of the board of a company to issue additional shares by issuing additional shares to existing shareholders. The most common split ratios are 2-for-1 and 3-for-1, which means that shareholders receive two or three shares for each holding, respectively. However, much higher ratios are not at all uncommon, as MasterCard Inc.’s (NYSE: MA) 10-for-1 split in 2014 and Apple’s 7-for-1 split also in the same year.
Unlike the process of making new shares by issuing dilutive secondary shares, a share split is a fairly simple process, because the share price decreases in the same share that the number of issued shares increases, which does not change the market cap. .
In Apple’s case, each investor will receive three additional shares for each share they hold, while Tesla shareholders will receive four additional shares for each share they hold. Apple’s new share price will therefore be 25% of the pre-split price, while Tesla’s new share price will be 20% of the pre-split price. Related: Iran contains oil tanker in Strait of Hormuz
As both Apple and Tesla have pointed out, the biggest reason why companies sometimes decide to split their shares is to make them cheaper and more affordable, especially for retail investors. Companies sometimes do share when they feel that the share price has become too expensive and unaffordable for the average investor. Splitting also improves the liquidity of a stock by making it more accessible to a wider range of investors.
At the time of this publication, for example, AAPL is trading at $ 458.98 per share, while TSLA has become one of the most expensive stocks on the market with a single stock changing hands at $ 1,638.01.
But even Tesla has nothing on it Berkshire Hathaway Class A shares (NYSE: BRK.A) which are currently quoted at $ 318,830.06 -a-pop thanks to the company that has never split the stock since it went public in the early 1960s.
In comparison, without periodically splitting its share, an original Apple share would be worth 56 shares today, meaning that the share price would be higher by a factor of 56, than $ 25,702.88 per share.
One caveat: While sharing Apple shares will be neutral for shareholders, it will take place in the Dow Jones by hitting it from his foot as the most influential forward in the benchmark to somewhere in the middle of the pack. This is because the Dow uses the old-fashioned and anachronistic price-weighting mechanism where stock price determines the weight of stocks in the index. Tesla obviously does not need to worry about such problems.
However, stock splits have become less common over the years.
In the past, stock splits were a favorite way for companies to chase a target price for their shares. In the mid-1980s, for example, it was not uncommon for about one-fifth of the S&P 500 files to split in a given year. But stock splits have become increasingly rare, in part because companies increasingly prefer to manage the value, not price, of their shares and also because of the growing popularity of fractional stock trading.
Faction trade
Today, numerous brokers including Robinhood, Charles Schwab, Interactive Brokers and Fidelity among others can buy investors shares of shares, although the main exchange has not yet. Related: Oilfield companies are taxed on permits
For example, Apple and Tesla are some of the most popular shares on Robinhood, with Apple ranking as the most popular share on the app for zero fees in the last 30 days, while Tesla ranks # 4 on Robintrack. If you only have full shares in both companies, it is easy to calculate what your portfolio will look like after the split.
However, things get a little more complicated for investors with fractional shares, as several brokers treat these class shares differently after a share split.
Some brokers split both full and fractional shares, while others will sell your fractional shares before the split and deposit the money back into your account. Robinhood belongs to the former group. In this case, a Robinhood investor who, say, 0.1 of a share in Apple would get 0.4 of a share still worth ~ $ 45.89 after the split, while a Tesla shareholder would get 0.5 of a share that is still worth worth is ~ $ 163.80.
Cash App is another broker that also splits fraction shares.
The good part: If your brokerage liquidates your fractional shares before the split, it should still be simple enough to buy them back after the split.
We advise investors who have fractional shares to contact their brokerages before the split.
By Alex Kimani for Oilprice.com
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