The tech giants also have something in common: The two announced stock splits this month that will dramatically lower the cost of the company’s stock. Apple’s 4-to-1 division is expected to bring the price down from around $ 500 per share to closer to $ 125. Tesla’s 5-to-1 split means you could pay around $ 420 per share instead of the $ 2,100 it is currently trading at (depending on the prices when the splits occur).
There’s a strong argument to be made that these divisions don’t really matter (I know, because I did). But there are also two big reasons to believe that they will actually be a godsend for investors. Here’s why.
1. Increased demand for stocks could push up the price
First of all, a stock split does not change the value of shares in Apple, Tesla, or any other company. Stock splits do not affect a stock’s value or a company’s market capitalization. In a spin-off, there are simply more shares outstanding, each with a correspondingly lower price. After all, splitting a $ 100 stock and ending up with five $ 20 stocks is absolutely no different than taking a $ 100 bill and splitting it into five $ 20 bills.
But stock splits mean that individual stocks cost less to buy. Historically, this has been the driving force behind most corporate decisions to split stocks. When a stock costs $ 125 instead of $ 500, more people can afford to buy a stock. This can lead to increased demand, which in turn can drive up the share price even though the value of the company has not actually changed.
Theoretically, this should no longer be a problem as a growing number of investors now have access to fractional shares. Here’s what they look like – fractional shares available for people who don’t have the money to buy a full one. However, while more brokers are now offering fractional shares, not all do. And some that won’t allow you to place limit orders for them, making it more difficult to buy at the desired price.
A typical investor is probably not going to switch brokerage just to get access to fractional shares, so a split can always make the share more accessible. Moreover, not everyone who is potentially interested in buying a share of Apple or Tesla is even aware of the possibility of buying fractions of shares. For casual investors who want to buy a few stocks, a quick glance at an expensive per share price might deter them before exploring this option. This can be a particularly big problem with companies like these that are known names.
As fractional shares become more widely available and more familiar to investors, this advantage 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 stocks when their price per share drops after the split.
2. Perceptions matter
When investors choose stocks, they should do their research to assess whether the stock price is worth paying. After all, a stock with a high price per share is a good deal if it has high growth potential, while a trade for just a few dollars is overvalued if the company is struggling and its price per share is falling. quickly.
But most investors are not 100% rational, and far too many retail investors often judge whether a stock is “expensive” by the price of a stock. In fact, a review of the most popular stocks on the Robinhood investment services platform shows that many of the platform’s investors (who are often younger and less experienced) are either flocking to well-known tech stocks, or to stocks trading at $ 10 per share or less. Many of those companies with a stock price below $ 10 are not great, but inexperienced investors may view them as good deals just because they are cheap to buy.
For many investors who are looking for “cheap” deals, a high stock price can deter them from buying stocks for hundreds or thousands of dollars – even if they can buy fractional stocks for just a few dollars. . It’s just seems expensive, if they confuse price for value.
And for the many ‘irrational’ investors out there, owning a fraction of a share often doesn’t seem as appealing as owning a whole share – even though in reality there is no difference and they will do the same. potential gains anyway. In other words, the fact that people can afford to buy just 0.25 share of Apple, say, may be enough to convince them not to buy at all, when they would be happy to pay $ 125. for a full share.
Of course, no one wants to think of themselves as an irrational investor. But the point is, many people’s subconscious biases constantly shape their financial decisions – sometimes to their detriment. Companies know this and are aware that by lowering their share price, they look as a better option for investors, although absolutely nothing has changed.
So, do the Apple and Tesla stock splits matter?
While I maintain my position that Apple and Tesla are going their separate ways should not matter to investors, they might very well.
The fact that Apple and Tesla’s stock prices have both risen since the announcement of their splits shows that they are still having an effect, at least in the short term. Of course, if fractional stock trading becomes widespread, investors in the future may not quite see the rise in stock prices that owners Apple and Tesla are currently enjoying.