Stock Splits Explained

Six months can make a huge difference in the stock market. After the Coronavirus outbreak, the market saw a meltdown. But now stocks have recovered. Two companies have done so well that they have decided to hold stock splits: Tesla and Apple. The move created a lot of media attention, 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 current shares into multiple new ones. For example, a company might divide every one of its shares into two, three, or more. After stock becomes too expensive, many companies will choose to split stock to lower the trading price and make it more appealing to investors. Overall, it does not make a company any cheaper. But it does make it easier for average traders to buy shares in some of the biggest companies.

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.A company will do this for two reasons: raising the share price and to attract investors who find the stock more valuable if it has a higher price.

Over the last 60 years, the ten largest global brands have had stock splits that led to double-digit gains in investment over the following 12 months. Apple has completed four splits (1987, 2000, 2005, and 2014), with an average gain of 10%. This is Tesla’s first stock split, and it has recorded a decent return so far.

How Does It Impact Your Money?

Because stock splits make shares more affordable, it creates more media buzz. Some say that it is merely a marketing tool to encourage smaller investors to buy the stock. For the most part, if you own shares in a company your bottom line will not change all that much. One Wall Street expert compared 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!