There has been a lot of hype over Apple’s and Tesla’s recent stock split. The splits took place after the market closed on Friday, Aug. 28, trading at their new prices on the markets opening on Monday, Aug. 31. Splitting of stock is a good way to determine if a company is doing well. It means their price is too high, so they want to make their company more available to a broader investor demographic. Well this is great and all, you might be thinking, but what does it mean when companies split their stock?
What does it mean to split a stock?
All publicly traded companies have a finite amount of shares that makes up the entirety of that company’s worth (which is called the shares outstanding). Think of it like a pizza pie with its eight slices being the shares. There can be many reasons for splitting a stock, but for whatever the reason is, the Board of Directors of the company wants to increase the amount of shares that makes up the company. They do this by offering more shares to the current shareholders. For example, Apple split 4-for-1, so for every one share that a current investor has in Apple, they will receive four shares once the split is initiated. So, if a company had an outstanding of 10 million shares and they split 2-for-1, then their outstanding will be 20 million shares. This also affects the stock price. After a split, the price will be reduced because the number of shares making up the shares outstanding of the company will have increased. So, if one share was worth $2 and you did a 2-for-1 split, then the share would be worth $1. By doing this, the company is increasing their shares but not increasing or decreasing the value of the company.
What is a reverse stock split?
Just like companies can split their stocks, they also can merge their stocks together, which is a reverse stock split. By doing this, companies are decreasing the number of shares and increasing the value of each individual share. Think of it like fusing pizza slices together that make up the pie. For example, if you have an outstanding of 20 million shares in your company worth $1 a share and you do a 1-for-2 reverse split, then you will have an outstanding of 10 million shares being worth $2 a share.
After the splits took effect, both companies shot up to record highs. Apple rose more than 3% by its closing time after its 4-for-1 split, dropping the price down from around $500 dollars a share to around $125 dollars a share. Tesla climbed up to 13% by its closing time after its 5-for-1 split, bringing the price down from around $2,210 a share to around $444 a share. This was in spite of Monday’s bearish market with the Dow Jones closing at a loss of 0.78% and the S&P 500 closing at a loss of 0.22%. This is the fifth time that Apple split since it went public in December 1980, and this is Tesla’s first time splitting since it went public in June 2010.
Individual stocks are a great way to save money for the future if you know what you’re doing. And a stock split is good news for lower-income investors. Will you take this opportunity to invest?