"So it turns out that cashing in a $5 bill for five one dollar bills means you have more money? Now the question is, which company is up next to do a stock split..." - Lisa Abramowicz, Bloomberg
The look on her face said it all when I walked in the door. I could tell my wife needed a break. She had been chasing around three kids all day. My eyes were burning from staring at a computer screen for 10 hours. Plus, I wanted to catch part of the Blazers Lakers playoff game. It was time to call in reinforcements.
"Girls! I need you to watch your brother for 30 minutes. I'll pay you each $2."
The girls nod with excitement. They were saving up to buy new LOL dolls.
I had pulled this off many times before. I set the Alexa timer for 30 minutes. The girls would take their 13 month old brother into the playroom. Mom and Dad would get a few quiet moments to decompress. At the end of the 30 minutes, I would quickly pay the girls two singles each, which they would rush to stuff into their piggy banks.
When Alexa began to ring signaling the end of the babysitting assignment, the girls rushed over to me eagerly awaiting payment. I opened my wallet and only had a $5 dollar bill. I handed it over and proudly explained they were in luck, $2.50 each since Daddy didn't have exact change.
They stared at the single $5 bill like I had handed them a pile of garbage.
"Awwww, this is only one! We want two each."
I tried to explain that $5 is more than $4 and I had actually overpaid them. They weren't buying it, fixating on the single note vs. the four dollar bills that usually came with payment.
I looted Mommy's purse and found four one dollar bills. They lit up with excitement.
"Daddy paid us! Thank you Daddy!"
Welcome to the irrational euphoria of stock splits.
Source: Reuters Business
Apple and Tesla investors are clamoring over more shares at a lower price. The split has zero fundamental impact on the value of the two companies. Here's the official definition of a stock split...
If a company issues one share that trades for $1 billion or 1 billion shares that trades for $1, the overall value of the company is the exact same. You wouldn't know that by looking at TSLA or AAPL since the split announcement...
The above graph shows recent performance of Apple (blue) and Tesla (orange). Since each company announced their respective stock splits, they have seen their market caps increase by a combined roughly $700 billion! AAPL is now bigger than the entire Russell 2000 small cap index.
Given the fanfare around the split, I would expect other high share price technology companies to follow suit (think Amazon and Google).
Historically, the primary reason for a split is to make it more accessible for retail investors to buy shares. Take Amazon stock, it currently trades for ~$3,500 per share. A person contributing $400 per month to their Roth IRA would have to save for nine months to buy one share of the e-commerce giant. A 10 for 1 stock split would equate to a $350 share price making owning Amazon stock much easier.
However, large financial firms like Schwab and Fidelity allow investors to buy fractional shares. This new development makes stock splits less attractive.
The excitement around the split says more about the irrational sentiment surrounding certain "darling" stocks right now. Search "stock splits" on Twitter and you'll get all sorts of ridiculous proclamations (these are real Tweets)...
A 4 for 1 stock split ... DAMN I WISH I HAD MORE STOCK IN APPLE.
apple stock split??? BUY BUY BUY STOCKS OMW
Woo hoo, let's do a stock split and let the sucker run!
Facebook needs to take care of the shareholders for a change and announce a 10 for one stock split and by Monday the stock will be at $500 a share. get a hold of investor relations and tell them you want nothing less than a 10 for 1 !!
If you own Tesla or Apple, congratulations, you've done very well.
If you're thinking about buying because of a stock split, you're not getting a deal because the share price is lower. It's the same pie cut into smaller pieces.