There has been a recent phenomenon of investors and traders placing bets on stocks of companies that have declared, or are expected to declare, a stock split. There are a number of misconceptions regarding stock splits. One misconception I would like to dispel from the outset: Stock splits have absolutely no direct impact on a company's future prospects!
What is a stock split? When the price per share of a company's stock moves well into the triple-digits (like Apple) or even quadruple-digits (like Tesla), the board of directors will at times decide to make the shares more "affordable" for the small investor. They do so by issuing a multiple number of new shares for every share that investors own pre-split. For example, Apple's board declared a 4-for-1 stock split that took effect today. Shareholders will receive 4 new shares of Apple stock for each share that they owned pre-split. The stock closed last Friday at about $500 per share. Today the shares opened in the vicinity of $125 per share, or about one fourth the price pre-split.
Fundamentally, nothing at all has changed for the company. Existing shareholders now own the exact percentage of the company that they owned pre-split. So why all the ballyhoo? Not so clear at all!
Famed former hedge fund manager Leon Cooperman put this phenomenon into perspective this morning in an interview on CNBC. A stock split can be compared to someone exchanging a $5 bill for five single dollar bills. Is that person better off? Not really. Or, more realistically, not at all.
Perhaps one could make the argument that a stock split is just a reflection of how well the company has been performing. The stock price has already responded to the fundamental performance of the company by adding a few digits to the share price, leading the company's board to approve the stock split. But clearly, the stock split, in of itself, is not a compelling reason for growing increasingly bullish.
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