In a recent article for The Washington Post, Bloomberg columnist Nir Kaissar explains the mechanics of stock splits in the wake of the recent spotlight on those of Apple and Tesla “just when millions of Americans are buying stocks for the first time on Robinhood and other trading apps.”
“Here’s the gist,” he writes: “Publicly traded companies occasionally increase the number of their shares in circulation,” by splitting the stock so it’s price is cut in half and every shareholder receives an additional share. The market value of the company and the value of each shareholder’s investment, however, is unchanged.
“In other words,” writes Kaissar, “stock splits have no financial significance. Investors are no better or worse of when a company splits its shares.” He notes that in the days before investors could purchase fractional shares, stock splits might have been valuable in that they offered an entry point to purchase a suddenly less expensive stock. But “in this new world of fractional shares,” he writes, “stock splits are mostly a cheap trick. By lowering the stock price, companies hope to make investors feel as if the stock is on sale and thereby induce them to buy additional shares—despite the fact that nothing has changed.”
Regarding Apple and Tesla, Kaissar notes that both stocks have declined since their recent splits, evidence that perhaps “Robinhooders aren’t so gullible after all. Perhaps they noticed that both companies are just as extravagantly priced as they were before the split.”
Kaissar concludes with advice for investors: “If you only remember one thing about stock splits, it should be this: They’re best ignored, no matter how much hype accompanies them.”