What a difference six months make in the stock market. After a meltdown during the Coronavirus crisis, stocks have recovered and rallied to historical highs. Two companies have surged so much that they have decided to undergo splits: Tesla and Apple. The move generated a lot of media attention and triggered investor appetite, but what does a stock split even mean?
What is a Stock Split?
Companies on the stock market have a certain number of shares that people can buy and sell. A stock split is when a company divides its current shares into multiple new ones. For example, a company might divide every one of its shares into two, three, or more. This can and attract new investors, since there are more stocks to buy and each one is cheaper since the prices are also divided. After stock becomes too expensive, many companies will choose to have a stock split to lower the trading price and make it more appealing to investors. Overall, it does not make a company any cheaper. But it does extend temporary “discounts” that offer an opportunity for average traders to buy shares.
The most common forward split ratios are two-for-one, three-for-one, and four-for-one. Then there is the reverse split, which is the opposite: The business reduces the number of its shares and increases the share price. Corporations will trigger a reverse split for two reasons: raising the share price and to boost its appeal for investors who find the stock more valuable if it maintains a higher stock price.
A Brief History of Stock Splits
Over the last 60 years, the ten largest global brands have initiated stock splits that have led to double-digit gains in investment over the following 12 months. Apple has completed four splits (1987, 2000, 2005, and 2014), and the iPhone maker has enjoyed an average performance of 10%. This is Tesla’s first stock split in its decade-long history, and the electric-car maker has recorded a decent return so far.
Here is a look at some other splits in history:
- Amazon: Three share splits and a 209% gain.
- Microsoft: Nine share splits and a 47% surge.
- McDonald’s: Nine share splits and a 22% increase.
- Disney: Eight share splits and an 18% jump.
- Alphabet (Google): One share split and a 6% decline.
How Does It Impact Your Money?
Because stock splits make shares more affordable to more people, it creates more buzz, especially if you are a larger organization. Walmart, Amazon, and Zoom would generate more headlines than an obscure company nobody has ever heard of before. Some say that it is merely a marketing tool to encourage smaller investors to buy the stock. For the most part, if you already own shares in the company, your bottom line will not change all that much. One Wall Street expert likened it to one dollar turning into four quarters. But it is still fascinating to see something like this occur in the middle of a pandemic. After the stock split, Tesla surged 20%, and Apple advanced 6%. What a time to be an investor!