Hey everybody, Dave Bartosiak here with a new look Trending Stocks. I’ve gotten a little more tan, the beard a little more full, I’m a little wider, but, I’m also, much, much wiser. So wise, in fact, that now, in addition to bringing you the lightest, funniest and most ironic stories from the investment world, I am also going to drop a little knowledge. Like today’s tidbit here on stock splits. What happens during a stock split? And why did Apple and Tesla go down after their splits when stonks only go up?
Let’s start at the beginning. I am going to compare two stocks and I want to ask, which company is worth more money? Going to the computer here, I have pulled up Tesla (TSLA) and Apple (AAPL). Tesla is trading in the high $300s while Apple is trading in the low $100s. Pretty obvious right? Right? Right?…WRONG.
You see folks, share price is only part of the equation. The amount of shares outstanding is another. If you multiply the number of shares outstanding by the stock’s price you get something called Market Capitalization or Market Cap for short. Whoops. I know I’m not allowed to say the word “Short” so close to the word “Tesla” or the Teslarati will go crazy on me.
Here we can see that Tesla has a market cap of about $340 billion while Apple has a market cap of $2 trillion. Even though Tesla has a higher share price, it is not more valuable than Apple.
Now let’s circle back to a stock split. When a stock splits, say 5-for-1 like Tesla did, it increases the number of shares outstanding. At the same time, the stock’s price is cut down. Here, the number of shares outstanding was multiplied by 5 while the stock price was divided by 5.
Here’s a fun exercise. Let’s say I have this beautiful yellow Ferrari mug full of bourbon, er, I mean, uh, coffee. Then I announced, hey everybody, I’m doing a 2-for-1 split of my bur…coffee. I take my Corvette Racing mug and I pour in some coffee. Now, I have two mugs of coffee. Does that mean I have more coffee? No. I have the same amount of coffee, it’s just that now I have the coffee in two different mugs.
The same goes for a stock split. While a stock split does give shareholders more shares, it has no actual effect on the overall value of a stock. Market caps remain the same, valuations remain the same, the only things that change are the stock price and the number of shares outstanding.
That being said, this time, both stocks went crazy on the news of the split. Tesla shares rallied from a split adjusted $273 to nearly $500 while Apple went from split-adjusted $93.77 to over $135.