Something is happening that hasn’t been done in a while. Two well known companies have decided to split their stock. Apple announced a 4 for 1 stock split and Tesla announced a 5 for 1 stock split. Both splits are happening the week of August 31st.
What this means is that if you have 10 shares of Apple before the split, after the split you will have 40 shares of Apple. If you paid $100 a share for those pre-split shares, your cost basis will change to $25 a share after the split. Just because you have more company shares doesn’t change your ownership percentage of Apple. It just means that there are now 4 times as many shares of stock in circulation than before.
Why would they do this? There is a perception that when a company’s share price gets too high, individual investors are priced out of owning it. This may have been the case 10 or 20 years ago. But today, most custodians allow investors to own fractional shares of companies (you can buy 1/10th or 1/4th of a share). Some investors may not like the idea of buying fractional shares, but there aren’t any hurdles preventing individual investors from investing in the highest priced stocks.
Apple has a second reason to split its shares. Apple is one of the thirty companies used to compile the Dow Jones Industrial Average. This is a price weighted index. The index is computed by adding the stock price of each of the components and dividing by the total number of components. If one stock has a significantly higher price than the others (Apple), then it has a significantly higher weighting in the index. For example, if Apple (priced at $500 per share) gains 1%, its impact on the index is much higher than if Verizon (another Dow component priced at $60) gains 1%. When Apple splits its stock, its price will be more in line with the other Dow components.
So remember that while stock splits have become less common, it still doesn’t change the valuation of the company. It only adds to the number of shares in circulation.