Apple (AAPL) and Tesla (TSLA) both recently announced stock splits.
Apple will be performing a 4-for-1 stock split, effective August 31. This will be Apple’s fifth stock split since going public and will bring the price of their stock down to around $115 based on the current price. Meanwhile, Tesla's share price will come done to the $380 range with the company’s 5-for-1 split scheduled for the same day.
What are Stock Splits?
A stock split is when a company increases the number of shares outstanding while giving investors a proportional amount of new shares. In Apple's case, investors will get have four shares after the split for each share they had before the split, but each share will be worth a quarter of the pre-split price. Stock splits have no effect on the underlying value of the corporation, so the value of an investor's holdings isn't change by the split, only the number of shares is different.
Why do Stocks Split?
Despite the fact that the value of the company does not change, stock-splits are widely seen as a bullish event.
This is because a stock-split signals to investors that the board wants to attract new investors by making the price of the stock lower. This likely made more sense in years past when trading in lots of less than 100 shares came with higher costs. Now that most brokerages have no trading commissions, and some allow not only odd-lot purchases, but fractional share purchases, it is hard to tell how many new investors stock splits actually bring in.
There are other advantages to lower share prices for investors though.
Rebalancing a portfolio is easier if you can make transactions in smaller units.
Trade prices can also be better at lower prices. Stocks with lower prices tend to have tighter spreads between the bid and ask, making slippage less of an issue with lower-priced stocks.
What does this mean for Apple and Tesla investors?
Investors will want to keep a close eye on both Apple and Tesla as their stocks approach the split date. Stock splits are often seen as a bullish sign and barring some unforeseen bad news, both stocks could keep rising into their splits.
In particular for Apple, investors will want to track the WeChat ban. In a Weibo survey, 95% of 1.2 million respondents said that they would rather give up their iPhone than WeChat. Any signs that the Trump Administration could force Apple to stop doing business with WeChat, would act as a drag on Apple’s stock. Since Apple investors are sitting on big gains, it is possible they may use the stock split as an opportunity to lower their exposure to the company, especially now that they can sell a smaller part of their holdings.
In the case of Tesla, investors will need to watch out for higher volatility. Despite having a stock price that is over $1,800, Tesla stock remains incredibly volatile. And now with increased access to Tesla stock, the company may experience even more shocks to its stock price than before. Investors who buy higher-priced stocks may be doing so out of a belief in the long-term future of the company. With a lower price point, Tesla stock may experience more swings in their price as the stock will become more attractive to day traders.
Additionally, Tesla is the most bet-against company on the market. Lowering the price will make taking bets against the company even more affordable.
