Updated: Oct 9
In this episode, we are explaining the Apple and Tesla stock splits. In summary, A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the liquidity of the stock. Both Tesla and Apple split their respective stocks this week. Apple has made history by splitting its stock for the 5th time since the company went public in the 1980s.
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The information in this episode comes from Market Watch, Invest-o-Pedia, Yahoo Finance, Business Insider, Ally Invest, the Motley Fool, and CNBC.
What are stock splits?
According to Invest-o-Pedia, a stock split is (quote) “when a company divides the existing shares of its stock into multiple new shares to boost the stock's liquidity.” And what this means is that a company can split its shares, dropping the price typically which allows more people to invest in the company.
So when they said to boost the stock’s liquidity, that means that they are trying to create more new cash flowing into the company. Publicly traded companies do this quite a bit, so
Why this is perceived as monumental news?
This is the fifth time in Apple’s history that they have split their stock since becoming a public company in December 1980. According to Market Watch, (quote) “Had Apple never split its stock, shares would currently be changing hands for roughly $28,000 apiece.”
That’s pretty incredible! I can see why they would want to split that up a bit. As of recording, the value of one stock in Apple is around $122.89. I gathered that number from Yahoo Finance by the way. Can you imagine trading a single stock for $28,000? Even after Tesla’s split, one stock is roughly $410 a piece right now.
How well do stocks usually do after a split like this?
So in Apple’s case, pretty well. According to an article on Business Insider, historically Apple has performed well after each of its stock split.
This split was a 4 to 1 split. This means that if you owned 1 stock in Apple, you now own 4 of them. Each split is a different ratio, but they are typically 2-4 splits. In one case, Apple did a 1 to 7 split in 2014, and that was followed by a 36% return over the next year. All and all, according to Business Insider “Investors who owned one share of Apple before its first stock split in 1987 would own 224 shares today.”
Does splitting a stock always mean that a business is doing well?
While Apple has demonstrated generally strong returns following its stock splits over the years, not many companies have followed its path. According to Ally Invest, “fewer S&P 500 companies are splitting their stocks now than in the 1990s when it was all the rage.”
CNBC reported that both Apple and Tesla stocks dipped after the split, but it seems like both are coming back quite ok. Tesla was able to split their stock at 5 to 1, they are still at over $400 a share. Not all companies continue this trend of splitting the stock.
That’s right, according to an article by the Motley Fool, “Amazon, as it rose nearly 2,000% from the beginning of 1998 to the end of 1999, split its stock into three separate occasions. The stock crashed by more than 85% from 2000 to 2002, and the company has yet to do another stock split despite massive gains.”
I had no idea that Amazon hadn't done a split for almost 20 years. Super interesting to see Tesla and Apple do this, and to see how their stock does in the near future.