Since there’s been a lot of chatter around stock splits,

Let’s discuss what they are and why companies do it

#FinanciallyFluentThread #StockSplits

A stock split is a decision made by a company to divide its existing shares into multiple shares.

Increasing the liquidity of the shares

For example: 2-for-1 or 3-for-1.

If you’re an investor in the company that splits its stock, you’ll have multiple shares for every share held before the split

The latest two examples of stock split announcements are Apple and Tesla.

Tesla is splitting 5-for-1.

For every share of Tesla stock you have, you’ll have 5 shares once the split happens.

Dividing the stock price by 5

It’s important to understand the fundamentals & market cap of the company do not change because of a stock split

The main reason behind stock splits is because the company feels the share price is too high or that they are priced significantly higher than their competitors.

This gives new investors more confidence in investing in the company.

When one couldn’t invest at $1,500/share, you’d probably be able to afford $300/share

Although fractional shares allow us to invest w/ less than the full price of a share, stock splits can be a marketing tactic.

If you do have fractional shares of Apple or Tesla, depending on the platform you’re using, your shares might be liquidated & credited as cash to you.

We’re all human so our psychology tells us that we’re more comfortable

Purchasing 100 shares of $10 stock
vs
Purchasing 10 shares of $100 stock

Another reason is liquidity for traders. Gives them more flexibility to buy and sell without making a huge impact on the price.

Just remember that since the price of the stock will be “lower”, that doesn’t mean the company has fundamentally changed or is “cheaper” - it’s still the same company.

Hope that helps!

#FinanciallyFluent