Apple and Tesla announce stock splits – here’s what you need to know

Equities

Apple and Tesla have both announced that they will split their stocks at the end of this month. Apple shareholders will be granted three additional shares for each one they hold, while Tesla shareholders will receive another four shares for each one they hold. 

The price of each share will be divided by the size of the split to reflect the increased supply: AAPL will start trading at 0.25 times the pre-split price, while Tesla stock will trade at 0.2 times the pre-split price. 

But why are Apple and Tesla splitting their stocks, and how will this affect your trades? 

Why are Apple and Tesla splitting their stocks? 

Apple was the first to announce its stock split earlier this month, followed a few days later by Tesla. Both shares have rallied hard since the announcements although a split shouldn’t theoretically affect their value. 

Stock splits usually happen for two reasons: to increase liquidity and to make the stock more attractive to retail investors. 

Liquidity 

An asset’s liquidity refers to how easily it can be bought and sold without impacting its pricePutting more shares into circulation often increases its trading volume, which can narrow the spread between bid and ask prices. This could make it easier for buyers and sellers to get a fair price for the shares they want or have. 

Appeal 

Apple stock currently trades for around $430 per share, while Tesla has surged towards $2,000 recently. The high valuation could be putting investors off. Shares are often bought and sold in standardised blocks – a “board lot” of 100 shares would cost an investor $43,000. If the stock were split today, 100 shares would cost $10,750. 

However, modern ways of trading shares (such as leveraged products like Contracts for Difference) have made it more affordable to trade even expensive stocks, so the benefit isn’t as obvious as it used to be 

Regardless of the why the decision was made, investors have taken it as a sign of confidence in the stock – Apple and Tesla wouldn’t want to lower their share price if the companies felt that there wasn’t the potential for further appreciation. 

How will the stock splits affect my trades? 

On August 31st Apple stock will start trading at a quarter of the pre-split price, and Tesla will begin trading at a fifth of the pre-split price. 

Any existing positions on AAPL CFDs will be closed at the original opening price and new positions opened at the new split-adjusted price but for four times more units. The same will happen with positions on TSLA CFDs, but with five times more units. 

See below for an example – note that the prices given are based upon the market value as of August 20th and are for indicative purposes only. 

  • Before the split you have 100 units of Apple CFDs, each valued at $462 for a total value of $46,200. 
  • When the stock is split your position for 100 units will be closed at the original opening price (so P&L will display as zero) and a new position will be opened that is four times larger. In this instance your holdings would now be for 400 units of Apple CFDs.
  • The price of each unit will be worth a quarter of the pre-split price, meaning in this example each unit is valued at $115.50 for a total for $46,200 – exactly as before. 

If you didn’t already have a position in Apple and wanted to trade it, or want to expand an existing position, you would be able to buy the same quantity of units for a lower price, or more units for the same cost as before. 

In effect, the size of your AAPL and TSLA positions will be multiplied by the same quantity as the stock prices are divided by, meaning the value of your holdings will not change. 

How the Apple split will impact the Dow 

Anyone trading the Dow will also need to pay attention to the Apple stock split. 

The Dow Jones Industrial Average is a price-weighted index, so when Apple’s stock price drops thanks to the split the company will no longer be the index’s biggest constituent (that will be UnitedHealth). 

Moves in Apple stock will therefore have less of an influence on the Dow than they currently do. 

Will other companies copy Apple and Tesla? 

Investors are now looking to other tech giants to see whether they decide to follow suit. Amazon and Alphabet will be of particular interest – Amazon’s stock price is over $3,100, while Alphabet is trading near $1,500 at the time of writing. 

A lower stock price for Apple would make the stock more attractive, and Amazon and Alphabet may want to ensure they aren’t pricing potential investors out of the market. However, as the huge cost of an individual share in either of them proves, neither Amazon nor Alphabet has felt the need to resist high prices in the past.