Why do companies decide to split their shares?

Does a stock split change a company's fundamental value?
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Apple and Tesla

You may have heard about Apple and Tesla this week, as both companies decided to split their shares more or less at the same time. This means that they increased the number of outstanding shares and that lead to a drop in the price of individual shares accordingly. In Apple’s case, the price was divided into 4; for Tesla, the split was into 5.

To give you an example, an investor holding one, $500 share in Apple last week now owns four shares priced at $125 each.

So why do companies decide to split their shares?

  • To lower the price of their shares, making them more accessible to small investors.
  • To increase liquidity. More shares outstanding = more shares traded.
  • To change investors’ perceptions following a rapid hike in their share price or a singularly high price. For many investors, it may seem more likely for a $10 share to double to $20 than a $1,000 share to double to $2,000; however, in both cases, the rate of return, as a percentage, is the same.

What to do?

A stock split should not be one of the main reasons for buying a company’s shares. Although there are psychological reasons behind companies’ decisions to split their shares, a stock split does not change their fundamental value. Remember, whether you have a single $20 bill or four $5 bills, you still have the same amount of money in your hands!

The Claret team

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Author

  • Claret Asset Management specializes in offering portfolio management services to high net worth clients. We are completely independent and free of conflicts of interest. Claret was founded in 1996 with the objective of answering the growing needs of private investors.

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