Financial Freedom 101

All publicly-traded companies have a set number of shares that are outstanding. Stock splits are a decision by a company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. Tesla and Apple have recently done this, Tesla is doing a 1-5 stock split while Apple is doing a 1-4 stock split. This has caused there stocks to be pumped at unbelievable prices. Tesla went up 15% after there announcement and Apple went up 9% after announcing there stock split.

A stock split is when, One share gets split up into multiple shares, with no change to the total value of investors holdings. Each share is simply broken down into smaller shares so if you own one share of Apple it will turn into four shares. The value of the company does not change you are just rewarded with multiple shares at cheaper prices. Apple is currently trading at $457 so if they were to split today it would cost $114.25 per share. The fundamentals and the P/E of the stock are not changed at all simply there is just more shares being available to the public. The dividend on Apple stocks will go from $3.28 a share to $0.82 a share. Apple still makes 57 billion but the amount of shares they can offer to the public just quadrupled.

Tesla’s current $1,516 stock price translates into roughly a $303 post-split price. Newbie investors are gonna jump on this price thinking they got a good deal. there may be a spike in demand for the shares when they become more accessible to a larger base of investors, Further, a  surge in demand may occur because the move gives Tesla a greater chance of being added to the Dow Jones Industrial Average however, the price of Tesla shares will primarily be driven by the company’s underlying business performance — and a stock split has no impact on a business’s real, long-term potential.

While Tesla may continue to dominate the electric-car market and  grow its vehicle deliveries at rapid rates over the next few years i would still not buy this over priced stock. Tesla is overvalued and Elon just wants to pump his stock even more by doing this split.

The real question is are these splits good or bad for investors? 

Lowering a company’s share price can put its stock within the reach of smaller, individual investors. That’s good for the company’s liquidity and creates more demand for its stock.  Another reason for the price increase is that a stock split provides a signal to the market that the company’s share price has been increasing and people assume this growth will continue in the future, and lift the demand and prices. Now, with fractional shares available on all different platforms I do not understand the reasoning of these companies doing  stock splits because you can buy a fractional share of Tesla for $1 if you wanted too. Companies like Berkshire A have never done a stock split and have simply watched the value of there stock grow overtime.

Tesla And Apple Trend Starters

Is stock splits a thing in the past? Tracing back the history, in 1997, 102 companies in the S&P split their stocks, and in 2016, only 7 companies did so, a decline of more than 90%The last time a lot of companies performed stock splits was in the Dot-com bubble. These tech companies pumped there stocks by doing splits and this was pre-fractional share buying so these companies really went through the roof in prices. As a result of Tesla and apple going this route i think other tech companies will follow this trend. I wouldn’t be surprised if companies like Amazon,google, Facebook and Shopify all follow this trend due to the prices of their stocks being at all time highs.

“While both Apple and Tesla have seen their stocks rally following their split announcements, history suggests that they may underperform once those splits take effect,” Bespoke’s Paul Hickey said in an email.  Apple will go from the largest to the 16th biggest stock in the Dow, something that could “theoretically [decrease] demand from passive Indexers.” He believes Apple could “succumb to Newton’s Law of Gravity in the week’s ahead.”