Sunday, September 27

Stock Splits, Why?

For many people, the stock market seems daunting, regardless of how much money you have or do not have. The number one concern investors have about any stock is the price. Lower priced stocks are more attractive to investors for a multitude of reasons, but there is one main reason: they can buy more shares with the same investment. Smaller share prices make it more attractive for small investors to buy shares of a stock. Companies know this truth about investing; for that reason, the most popular stocks, including Apple, Google, and Amazon, have all split multiple times in the past. 

Split? Yes, all of these titans of industry have split up their shares into multiple shares of stock before. For the main reason of attracting investors by offering a smaller price per share. However, investors who bought shares of such stocks retain the same current value on their investment, but they end up just dividing the price of their current shares by the split number in order to get the new price per share. For example, August 31st marks the first time Tesla splits. The split is 5 to 1; therefore, somebody who owned 5 shares of Tesla, each valued at $2,213.40, will then own 25 shares, with each share post-split valued at $442.68. Interestingly, they are performing this split while Wall Street is calling for a loss. 

Tesla explicitly stated that the reason for this split is “to make stock ownership more accessible to employees and investors.” Tesla has recognized that small investors constitute an increasing proportion of investors and potential shareholders. It is crucial for Tesla to appeal to this demographic. Psychologically, $442 looks cheaper and more attractive than $2213 for a stock share. However, many people do not realize that they can buy fractional shares and make the same return on an investment regardless of the shares being split or not. Time and time again, companies must split in order to increase the demand for their stock. On the week of August 24, Tesla saw meteoric rises in the price of the stock because many investors saw the potential for more shares being bought after the split due to the much lower price per share. Trends show that this phenomenon will happen.

The implications of the split in the long run is yet to be determined. It is most probable that Tesla will split again for the same reasons it split on August 31. We do not know when that split will be and what it will be. It is almost certain demand for the Tesla stock will pent up again and excite investors, myself included. The electric vehicle industry is shaking up the economy and driving all of the markets and it is certain that Tesla is a stock to watch more so than ever.

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