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Both Apple and Tesla completed a stock split on Monday: Tesla did a 5-for-1 stock split, while Apple issued a 4-for-1 stock split. And while it may now look like shares became cheaper for the two high-flying stocks, that’s not true.
Apple Inc (NASDAQ: AAPL) began trading on a post-split basis today, following its 4-for-1 stock split. At the time of writing the stock was rising by 4.26% to $130.12. The split is originally designed to lower the nominal price-per-share, but we have to mention that split-adjusted Apple stock has a history of short-term selloffs.
Two weeks after the previous stock splits, shares of Apple have lost an average of 5.6%, trading negatively in all four instances. That underperforms the Dow Jones Industrial Average, which tends to be a coin flip in these post-Apple stock split weeks. The Dow has economized out a positive gain, on average, trading in the green half the time. This year, in particular, Apple shares rose by 70%.
Matt Maley, Boston-based chief market strategist at Miller Tabak & Co said:
“It makes absolutely no economic sense that a split should cause a stock to rally, but it almost always does. The general feeling is smaller investors can buy the stock.”
Tim Cook Wants More People in the Stock
One of the reasons most often cited for the Apple stock split is its ability to entice potential new investors. CNBC’s Jim Cramer said the move was made to create more reachable shares, and he quoted a conversation he had with Apple CEO Tim Cook.
“Tim told me last night, ‘Hey, I want more people in the stock,’” Cramer said.
Be it as it may, Apple isn’t alone among this year’s big players going for a stock split. Tesla Inc (NASDAQ: TSLA) also started trading at a new price-per-share after a recently announced stock split today. At the time of writing, Tesla’s stock went up by 9.05% to $482.75.
We have to explain though, that stock splits do not change a company’s underlying fundamentals. Even though the lower-priced shares can attract smaller investors, larger traders who already have the company’s shares can have more influence over the price action. The main key lays in the overall market environment and it has impacted trading after the limited number of previous Apple stock splits. Therefore, a stock split doesn’t make a company any “cheaper” overall, since its market capitalization remains the same. However, it gives a possibility for someone who previously couldn’t afford shares at previous levels to buy at lower prices.
Still, it’s important to stress that these discounts don’t last long. We have been witnessing the situations before where the big-name brands surged back again to the old levels (or even higher) soon after a split.
According to data from London-based social trading and multi-asset brokerage company eToro, the 10 biggest global brands that have carried out a stock split over the past 60 years have seen their share price rise by an average of 33% over the next 12 months.
Is It Good Time to Buy Tesla and Apple Stocks after Split?
With a $2.1 trillion market capitalization, Apple has certainly proven itself. Both services and wearables businesses are performing well even in the state of a pandemic. Also, the company’s growth was up 11% year over year in its fiscal third-quarter while earnings per share grew 18%.
Analysts expect Tesla’s revenue to jump 38% in 2021 but given how uncertain these outcomes are, investors should proceed with caution when it comes to buying the stock at this level.