Two of the most valuable and popular public companies – Apple and Tesla – completed stock splits on Monday. Wondering what that entails? And what, if anything, it means for your investments?
Let's start with how the process of a corporate stock split works.
Every publicly traded company has a number of stocks, or shares, that make up its total value. The combined worth of Apple's stock reached more than $2 trillion earlier in August. Tesla, meanwhile, is valued at over $400 billion.
When a company splits its stock, its total value doesn't change; it just ends up with more stocks, each at a cheaper cost.
Here's a food metaphor: If you ask the guy at the pizzeria to cut each slice in your large pie in half, you'll still go home with the same amount of pizza. You just have more, smaller slices now.
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Companies typically say they're splitting their stocks to make them affordable to more people.
But, is that reality? It's more of a way to grab headlines and bring in money, said certified financial planner Douglas Boneparth, founder and president of Bone Fide Wealth in New York.
"This was done as a marketing tool to get smaller investors to invest in the stock," Boneparth said. "The actual mechanics of the company are the same."
And therefore, so are your chances of making a profit on either Tesla or Apple, experts say.
"People ultimately want to know, 'What does this mean for my bottom line?'" Boneparth said. "The answer is: nothing."
If you own Apple in an index fund, for example, it's as if you had a dollar that just turned into four quarters, Boneparth said.
Apple is splitting each of its stocks into four, and Tesla five.
Still, people can seduced by the suddenly lower prices.
Not so fast, experts say.
Just because you can buy the stock now doesn't mean you're getting more value than you could before the split, said Stacy Francis, a CFP and president and CEO of Francis Financial.
If you can buy one Apple stock after the split, for example, remember that that singular stock is now one-fourth the value of what it would have been worth before the split — and why you paid one-fourth the price.
The math is, of course, the same if you already owned the stock when the split occurred.
"A two-for-one stock split means that for every share of the stock you owned before the split, now you own two," Francis said. "While you have two shares instead of one, the value of each share is half."
History tells us that a company's performance is unpredictable in the wake of its split.
For example, when Apple split in 2014, it spiked by nearly 40% for the year. Yet after its split in 2000, it was down 60%.
Tesla and Apple stock were up on Monday, but that doesn't mean much, said Allan Roth, founder of financial advisory firm Wealth Logic.
"In the long-run, [they] will be driven by the fundamentals of the companies and the splits will have no bearing on long-term performance," Roth said.
Here's more evidence that stock splits are more about headlines than your bottom line: These days you don't even need to be able to buy a company's entire stock to own it, and go along for its ride of ups and downs.
Many brokerage firms like Fidelity and Charles Schwab allow people to buy portions of a stock, known as fractional shares, Boneparth said, further showing that "stock splits mean absolutely nothing."
The idea that the process allows more people to buy the stock is, he said, "a moot point when fractional stocks exist." Before Monday, he said, "U.S. investors could have bought fractional shares of Tesla or Apple for $5 or $10."
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September 01, 2020 at 01:30AM
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Apple and Tesla are doing stock splits. Here's what that actually means to investors - CNBC
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