Spreads, calls, straddle, and splits. Surprisingly, these are all terms I learned in my Investment Securities course, and terms that can appear in the financial headlines. Most recently, a stock split. In this blog, I’m going to educate you about what they are, why they’ve made the news, and what to do now that Apple and Tesla made their recent stock split announcement.
A stock split is simply when a company divides their shares, based on a ratio of their choosing, causing there to be more shares available at a reduced price. For example, if I owned 10 Fyooz Financial Planning (FFP) shares, and issued a 2:1 stock split, I would get 2 shares for every one share of FFP that I own. After the split, my share count goes from 10 to 20. Yay! More Fyooz stock, right?! Yes, more shares, but not more total value.
Along with a stock share count, the price of the shares also gets adjusted. Let’s say each FFP share was worth $22. Prior to the split, I had $220 of Fyooz stock (10 shares x $22/share = $220). After the split, my total value does not change. Now that I have 20 shares, my price per share goes from $22/share to $11/share for a total value of $220. Again, my total value of Fyooz Financial Planning stock did not change.
What is a stock split?
A stock split is dividing a company's current share count into multiple to create more liquidity. Liquidity in this sense means the accessibility for a stock to be either bought or sold. It is believed that the cheaper a stock is, the more liquid it becomes, and the more available that stock is to trade.
What is market capitalization?
You cannot define a stock split without also defining what market capitalization is. Market capitalization is a calculation that takes the total number of outstanding shares multiplied by the price per share of a company. Why does that matter? Because the market capitalization does not change simply due to a stock split. Think of your own ownership of a stock as your personal market capitalization. My market capitalization was $220 before and after the stock split of FFP. Market capitalization is almost always displayed when you look up a stock. See below in the red square.
The market capitalization of Zoom (ZM) is 75.082B and the price per share is $266.15. This means that I can figure out how many outstanding shares there are since we know market capitalization = outstanding shares x stock price.
Why have stock splits been in the news?
In less than two weeks time, we’ve heard about two hot stocks announcing their decision for a stock split; Apple (AAPL) and Tesla (TSLA). Each of their announcements have been followed by a significant rise in share price. Apple made their announcement on 07/30/2020 when their price per share closed at $384.76. At the time of this writing (Monday, 08/17) the stock was trading at $458.43; an increase of ~19%. Tesla made their announcement on 08/12/2020, the day before Tesla closed at $1,374.39. As of this writing the stock was trading at $1,835.64; an increase of ~34%. Hey, remember when Dan talked about holding Tesla in February with MarketWatch? The splits will both occur on August 28th and reflected in all of our accounts the following business day, August 31st.
Apple made their announcement here, stating the Board of Directors approved the 4:1 stock split “to make the stock more accessible to a broader base of investors.” Tesla’s announcement, located here, stated the “Board of Directors has approved and declared a five-for-one split of Tesla’s common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors.” AKA, they each did the stock split for the same reason.
Now, I know what you're thinking….Awwww, Apple and Tesla, you’re so nice to be thinking of little ol’ me, and my little bitty dollars that can’t buy your super expensive stocks.
But, as my friend Mark Meredith with Meredith Wealth Planning stated, “If you cannot afford to pay $1,500 for a share of stock, you probably should not be picking and choosing stocks anyhow.” Read more on his thoughts with stock splits here.
Should I buy Apple or Tesla now that they announced their stock split?
The excitement of the stock splits has already begun. You may see that the stock price has increased in value and now you want in! But, if you purchase solely based on past stock price performance, you are setting yourself up for diminishing returns. Think about it, if all you had to do was analyze stock price in order to be a successful investor, you wouldn’t be reading this blog.
So no, you should not buy Apple or Tesla simply because of their stock split announcement. Because a stock split makes no difference to what is fundamentally going on with the company.
You’ve Already Missed Out
If you’re feeling a bit of FOMO (fear of missing out) right now, you’ve already missed the invite to this party plenty of times. This is Apple’s fifth stock split. Since it’s Initial Public Offering (IPO) in 1980, Apple has increased over 51,000%. Not because of stock splits, but because of their insane ability to innovate, create, and adapt. Let’s focus our attention on the analytics. Apple's earnings per share scaled 18% and it’s fiscal third-quarter revenue rose 11% year over year. These are all potential reasons to buy (or hold) Apple. A stock split is not one of them.
You May Already Own It
The other thing I want to point out to you is that you probably already own Apple (AAPL) and Tesla (TSLA). Pull up your investment accounts. I’ll wait…...Ok, got ‘em up? See that S&P 500 fund in your account? Apple is in there. It’s also the number one holding in the Vanguard Total Stock Market (VTI) ETF, Dow Jones fund, NASDAQ 100 fund, and plenty more. Tesla is also in the NASDAQ 100 and Vanguard Total Stock Market ETF. My point is, if you dig hard enough, you’ll find that you own one or both of these two stocks already.
‘Split’ is a dynamic word. You can split a charcuterie board with your friends, you can practice your splits in yoga, or you can share a story about the time you split up with your middle school sweetheart. Now that you’ve made it this far, you can add stock splits to the list of ‘splits’ you know about.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.