If you pay attention to anyfinancial newsat all, you've probably seen all the discussion lately about both Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) planning stock splits in the near future. Apple is splitting its stock 4-for-1, while Tesla is doing a 5-for-1 split.
When a stock splits, investors get multiple shares for each share they own, and the share price is reduced because more shares are now outstanding. In the case of Apple's split, you'll get three additional shares for each of your current ones, while in Tesla's case you'll get four extra shares. The split doesn't change the value of your holdings, though, nor does it change the market capitalization (the total market value of all shares outstanding).
For companies, however, there are a few reasons to do stock splits -- but one of the biggest and most important reasons really shouldn't matter anymore. Here's why.
Why stock splits shouldn't matter to investors any more
Companies traditionally do stock splits for one simple reason: To make shares of their stock cheaper. After all, the only things that change when a split happens are the price of a single share and the number of shares current shareholders own.
Companies aim to reduce the prices of their stocks through splits so shares are more affordable for investors. They figure that if the company's shares are selling for $5,000, it seriously limits the pool of potential buyers because many investors simply don't have enough money to pay that much for a single share of one stock. By reducing the price of the shares, more people can afford to buy them. Cheaper shares are also more attractive since investors don't have to make such a huge commitment to one company (which makes it harder for them to follow recommendations to build diversified portfolios that can mitigate their investing risk).
However, the businesses splitting their shares solely to reduce the cost for investors may not need to take this step anymore. That's because of fractional shares, which are now a trading option being offered by a growing number of big-name brokers. This option allows people to buy partial shares (as small as .001 of a share with some brokerages). Investors can now specify the dollar amount they want to invest in a company, instead of the number of shares to buy, so they aren't locked out of what might appear to be expensive stocks like Apple or Tesla.
Take Apple, for example. If it's trading at $500 a share on the day of the stock split, a 4-1 split would mean the share price would go down to $125 per share. So an investor with only $125 could now afford a full share. But that same investor doesn't have to wait for the split -- instead, they could take their $125 the day before and buy 0.25 of a share (assuming it was trading at $500 then too). The stock would split the next day, they'd end up with one full share valued at $125, and they'd be in exactly the same place.
That's great news for investors because it means splits really don't matter anymore -- you don't have to wait and hope your favorite company with a high share price splits its stock before you can buy in. It also means that companies may be less inclined to split their shares (although some may still do so because it makes those stocks better candidates for inclusion in price-weighted indexes like the Dow Jones Industrial Average).
And while stock splits may have historically had a positive effect on stock prices solely because they made a stock open to a wider pool of investors, thus driving up share prices due to increased demand, this is less likely to happen going forward since those stocks are now available for everyone to buy anyway. Since a split should no longer serve as a positive catalyst that pushes the stock price higher, that's yet another reason investors shouldn't care if one occurs.
So if you were hoping for Amazon stock to split next, or eager for Apple and Tesla's splits to make shares of these stocks accessible to you, there's good news: You don't have to worry about this anymore. If you want to buy into these companies or any other expensive stocks -- and you've done your research -- you can do so today by simply buying fractional shares based on whatever amount you have available to invest.
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