What is a Stock Split and What Does it Mean for Investors in Companies like Apple, Tesla or Netflix?

When companies such as Netflix, Apple, and Tesla announce that they are going to do stock splits, many small investors wonder what does that mean, and how that affects their own portfolios. Often they will hear that a stock split gives them more shares but it does not actually affect the actual value of your holdings. For many stocks this is theoretically true, but for others this is historically false.

A stock split happens when a company decides that its price per share for the stock is too high for small investors to afford. For example, it’s easy for an investor to buy stock that is valued at $10 or $50 a share, but it is much harder for them to purchase a stock that is valued at $1,500 or $3,000 a share. They may not be able to afford even one share, whereas they can afford several if the price is much lower. The split therefore makes the stock market much more fair to small investors, and those who are not backed by giant mutual funds, family trust offices, or investment companies.

When a stock split happens, the company announces that for each share of stock you currently own, after a certain date you will then get more shares for each share that you already have. You may get two for the price of one, or you may get five for one. It all depends on the company. But if the price was at $1,500 a share and it splits to 2 for 1, then each price is now $750 a share. You still have the same amount of money invested, $1500, but now you own twice as many shares.

This is why we say that theoretically it should not matter if the stock splits or not. Your investment amount should not change. Historically however what happens is that for exciting or fast-moving stocks, especially tech stocks, what you see is that when the price drops to a more affordable level for smaller investors, they in turn buy more of it, and therefore increase the demand and subsequent price of that share.

So if the stock drops to $100 a share from $1000 a share, then over a period of time it may end up rising to $150 or $200 a share just from sheer demand. This has already happened in the past with stocks like Apple, Netflix, and others. Many people assume it will also happen with Tesla and Apple in the future. Netflix also is an example of this growth in price per share before and after a stock split.

Does this mean that you should jump on board when a stock announces a stock split? Possibly, but possibly not. If you were already going to purchase the stock then you should go ahead. But if you think just jumping on board before the stock split will get you extra returns, then that is basically a risky investment. The stock’s future value really depends on the performance of the company itself. If the company underperforms in the future, you will lose money.

Bottom line, only buy stocks that you already think are good investments.