(Bloomberg Opinion) — Stock splits may be the least interesting and controversial subject in all of investing. But they shot to fame last week when Apple Inc. and Tesla Inc. split their shares, just when millions of Americans are buying stocks for the first time on Robinhood and other trading apps. So it’s worth unpacking stock splits for those who are encountering them for the first time.
Here’s the gist: Publicly traded companies occasionally increase the number of their shares in circulation. Let’s say a company wants to double its number of shares. It would announce a 2-for-1 stock split in which every share held receives an additional share. The price of the stock would be cut in half, so that the total market value of the company and the value of each shareholder’s investment are unchanged.
Consider Apple, for example. It closed at just less than $500 a share on Friday, Aug. 28. When the 4-for-1 stock split took effect the following Monday, the number of Apple shares in circulation quadrupled and the price of the stock was quartered to roughly $125. If you owned one share of Apple worth $500 on Friday night, then you owned 4 shares of Apple worth a total of $500 on Monday morning. Both the value of your investment and Apple’s total market value were unchanged. Tesla’s stock split 5-for-1, but otherwise the math is the same.
In other words, stock splits have no financial significance. Investors are no better or worse off when a company splits its shares.
So what’s the point? Increasing the number of shares should make it easier and less costly to buy and sell a company’s stock, at least in theory. Also, in the days before smartphones and trading apps, investors couldn’t buy less than a single share. So as a company’s stock rose, fewer people could afford to buy it. If a stock traded for, say, $2,213.40 a share, which was the price of Tesla’s stock before it split, then you had to invest at least that much. But if the company split its shares 5-for-1, as Tesla did, then the stock price would be cut to around $443, allowing people to invest more cheaply.
Today, price is no longer a barrier because investors can buy a fraction of a single share. In this new world of fractional shares, stock splits are mostly a cheap trick. By lowering the stock price, companies hope to make investors feel as if the stock is on sale and thereby induce them to buy additional shares — despite the fact that nothing has changed. It’s not unlike the game retailers play when they mark up prices so they can reduce them later to entice buyers.
The trick seemed to work at first. Apple’s stock soared 7.5% during the two trading days after the split. Tesla fared even better, its stock climbing 12.6% the day the split took effect. Market observers were quick to ridicule retail investors for falling in the trap, particularly the mass of new investors on Robinhood and other trading apps. It did appear as if trading in Apple and Tesla spiked on those platforms after their stocks split, but it’s hard to say to what extent that contributed to the surge in their share price given that retail investors are merely one of many variables that move markets.
In any event, the question is moot because the rally has since fizzled. Apple’s stock is down 12% from its post-split bounce as of midday Friday, while Tesla has tumbled 18%. The market value of both companies is lower now than it was before the stock split. Perhaps Robinhooders aren’t so gullible after all. Perhaps they noticed that both companies are just as extravagantly priced as they were before the split, with Apple trading at 36 times this year’s expected earnings and Tesla trading at a breathtaking 226 times, compared with 26 times for the S&P 500 Index.
Even so, some investors may still be confused. Days before Apple and Tesla split their shares, Dave Portnoy, the Barstool Sports founder turned stock-investing pied piper, broadcast this to his followers about stock splits: “You want one car or two cars? You want one dollar or two dollars? You want a hundred dollars or two hundred dollars? You always want more, more, more, more. It’s [expletive] math. It’s economy. It’s statistics. It is as simple as anything.”
Apparently not simple enough. The mistake some investors make is assuming that share prices will climb to where they were before the split — that Apple’s share price will approach $500 again or that Tesla will climb above $2,000. That’s far from guaranteed, of course. And even if Apple and Tesla’s stocks do move higher, it doesn’t mean they wouldn’t have risen just as much without the split, so investors may not be any better off.
If you only remember one thing about stock splits, it should be this: They’re best ignored, no matter how much hype accompanies them.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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