- Corey Voorman
Stock Splits Explained
Two recent stock splits have captivated headlines. Apple and Tesla have both announced stock splits which occurred on Monday, August 31st; Apple stock was split 1 to 4 and Tesla was split 1 to 5. There are two types of stock splits: the traditional stock split and the reverse stock split. A stock split is a way for a company to control share price. A traditional 1 to 4 stock split on a $100 share price stock will result in shareholders receiving four $25 shares of the company they hold. A reverse stock split of the same ratio will take a stock trading for $25 dollars and would consolidate four shares the shareholder held and replace it with one $100 share. Inherent value is not created by action of the stock split or reverse split for investors.
Corporate reasoning behind a stock split can be varied. Many times a stock’s price can trade at a point that is prohibitive to smaller investors being able to access the stock; most important is to hold a share in accordance with prudent investment discipline. For example, Tesla traded prior to its stock split at an excess $2,000 a share. Berkshire Hathaway A trades at an excess of $327,000 per share. Many times, a split is seen as means to draw capital that would not have access to the share. Additionally, a traditional stock split can be used to decrease share price in an attempt to mirror or mimic share price of competitors in the industry. Of course, this is purely window dressing; the value of the stock remains unchanged.
A reverse stock split may be initiated by a company that has its shares fall drastically in an attempt to maintain respectability. EG a company whose share price falls below a dollar per share may attempt a reverse stock split to extricate it from the dreaded realm of penny stocks. Additionally, a reverse stock split may serve to stabilize share price by making it less available for speculation by traders.
Do stocks generally increase or decrease from a split or reverse split? The answer to this question is “It depends”. Apple’s stock split in 2014 resulted in a yearly gain of roughly 40%. In 2000, following Apples stock split, the company plummeted roughly 60%. Returns of equity following splits are all related to investor sentiment.