I own shares in Tesla and am considering buying more if its share issue goes ahead, I also previously had some in Apple and am thinking about buying back into it.
I understand that both have just had a stock split and that this is aimed at making it easier to invest because their share prices have risen so high.
How does this work though and why does it benefit investors?
Also, how do I keep track of the share price and how it has changed over the years, as when I looked online the split meant that the share price looked as if it had suddenly fallen heavily even though the shares had risen after the splits?
Tesla was the most bought stock last Monday at Interactive Investor following the stock split
Jayna Rana, This is Money, replies: As you already know, Tesla and Apple both had a stock split at the end of August.
This is where a company creates new shares and gives existing shareholders a certain number of these for each share they already hold.
The total share capital is not altered but rather split into a greater number of units. So, if you owned one Tesla share worth $2,000 (this was not the actual price at the split) you would still end up with stock of that value but it would be across five shares worth $400 each.
The main reason businesses do this is to lower their share price – which is what happened for both Tesla and Apple as you have noticed – without cutting their value.
This makes the shares more appealing to smaller investors and can improve liquidity, and eventually boost share prices even further. After all, unless you can buy shares fractionally – which some brokers do offer – you would have needed $2,213 to buy a single Tesla share before the split.
As expected, the stock splits saw both companies among the best-selling last week, with overall trades up 345 per cent on Monday on investing platform Interactive Investor, compared to last year’s August bank holiday.
Some analysts believe the value of Tesla and Apple could rise by a third over the next 12 months. This is driven not by the split but by outside market factors combining with their shares becoming a more accessible purchase.
Tesla split its stock 5-for-1 while Apple split its stock 4-for-1 in the move to make their share more affordable to everyday investors.
So what exactly happens in a stock split, sometimes referred to as a non-financial manoeuvre?
Imagine splitting a £20 note into four £5 notes – you have more notes, but the overall value is exactly the same.
The reason some companies choose to do this is simply to make the shares more marketable, and usually with the retail investor in mind.
Apple split its stock 4-for-1 last week
The stock split does nothing to the value of a company – for example, if you held 10 shares at a price of £1,000, after a 100-for-1 split the price would be amended so that you might now own 1,000 shares at the new price of £10 but the value of your holding is unchanged.
Richard Hunter, head of markets at Interactive Investor, said: It is therefore seen as a psychological move, helping investors get more ‘bang for their buck’, although nothing has changed – an investor with £10,000 to invest (in the above example) would be buying 1,000 shares post-split, as opposed to just 10 shares pre-split.
Apple shares closed on Friday (28 August) at $499.23 and after its 4-for-1 split (four new shares for each currently held) opened Monday 31 August at $127.62.
Similarly, Tesla closed on the Friday at $2,213 and after its 5-for-1 split opened Monday at $444.
In the UK, we call this a capitalisation, scrip or bonus issue – and would usually be described the other way round, so that Apple’s issue would have been a ‘1 for 4’.
This should not be confused with a right issue, where additional money is sought from existing investors.
Tesla’s stock split is now reflected in share charts, priced at c. $420 compared to c. $2200
Jayna Rana, This is Money, adds: Keeping track of the share price is simple. Good financial data sites will have reconfigured the share price graph to take the split into account.
This resets historic prices based on the split, so you can look back and see how the share price has changed in proportion to now.
That makes the comparison of the pre and post stock split price unnecessary, since they are effectively one and the same for investors to view. However, it does mean that historic share prices will be much lower than the level they actually achieved, ie instead of showing a $2,213 peak share price for Tesla, the charts now show a $498
Apple’s stock split is now reflected in share charts, priced at c. $120 compared to c. $500
You already own shares in Tesla and you are thinking about buying more. Now that Tesla trades at a fifth of its previous share price, smaller investors looking for a slice of the pie definitely have a more accessible entry point.
Some people are investing because the company is turning a profit, expanding its car line further with new models, making its cars slightly more accessible and seeing increasing sales. Tesla also has a strong position in battery and autonomous car technology.
Fans say that increasing sales, profitability, and attention suggests demand isn’t likely to weaken any time soon.
The stock split adds to accessibility for investors, with Tesla lowering the bar for entry.
There is even the possibility that Tesla may become part of the S&P 500 index soon, which itself could likely spur on further trading.
However, you whould also bear in mind that many are simply investing because Tesla shares have risen by such a huge amount – they are chasing gains encouraged by Tesla’s momentum.
Before investing in any single company’s shares it is important to take stock, look at the fundamentals of the company, its financials and its resilience – and consider whether it can continue to grow and deliver returns to shareholders and if the price is right.
As for Apple, though the shares have a price tag that is a lot less, investors think they will go in the same direction and it too has seen big gains this year.
You once had Apple shares but sold out of them. While you can never anticipate what’s going to happen, you might be kicking yourself for selling out and not keeping put.
Either way, like Tesla, you might still reap some rewards if you invest now but you might also be buying in at a high and need to be aware that there is a risk that very positive sentiment could turn and the share price could fall even while both remain two of the world’s most successful companies.