What a Stock Split!
What do Apple and Tesla have in common? Both knows how to do stock split at the same time same day!
Yes indeed, Tesla and Apple just did a major share split of 5-1 and 4-1 respectively. This has sent ripples throughout the markets. Tesla shares went up more than 10% while Apple shares popped 8% so far.
If you don’t understand what is a stock split, you can read up more here.
The important thing to note there is: While stock doesn’t have any impact on the companies’ finances or total value. IT DOES HAVE AN IMPACT on the movement of the share prices.
Why you may ask?
The perception of the stock being CHEAPER.
This may seem stupid at first glance. Afterall, the stock split is merely spliting the previous share into smaller portions hence the lower share price is just optics, not in real value. However, the optics is VERY IMPORTANT.
Most investors in the market are not sophisticated investors. They don’t spend much time studying the market therefore OPTICS is all they depend on.
With the stock split hyped up news and the “lower” share prices, it will attract more buyers.
“Tesla used to be more than $2000, now it is $400! So cheap!”
It matters for OPTIONS trader.
Yes, while the real value of the company does not change, the lower share price does allow more people to invest in these companies’ options.
Why? Because 1 option contract represent 100 shares.
When Apple was over $400 before the stock split, each options contract could cost around $5000.
However with a lower share price, the same options contract would cost around $1000.
This means more people could invest in Apple’s options with lower options premium.
This will definitely attract more retail investors or smaller portfolio managers as it is more accessible now and making portfolio sizing easier too.
All in all, this is a masterful stroke by the management of Tesla and Apple. And following the stock split, Tesla announced that they will be selling up to $5 billion worth of shares to raise money. My goodness, I could not have thought of a better plan!
However, should you buy into Tesla or Apple shares now? The stock split should not affect your decision. Ultimately, it is more important to invest in good companies.
This stock split will definitely prompt investors to pressure other “high price” companies like Google and Amazon to do the same. And my belief is that they will most likely do so.
I will be doing a piece on Tesla soon. I have been staying silent because I was doing my own research on Tesla and I think it is ready soon! If you want to receive that research, do subscribe to my mailing list!
