You’ve heard the news! Apple and Tesla both announced stock splits recently and like many people, you may be wondering just exactly what this means for the shares of each of these blue chip companies, and how it will affect the market.
Most of all, you probably want to know how this will impact you especially if you trade the two assets often on Olymp Trade.
The first piece of information you need to know is that ALL open positions in Apple or Tesla stock will be automatically closed at 7:55 PM UTC on Friday, August 28.
If you have trades going now or are looking to make some, please plan accordingly because we don’t want our clients to lose out because of automatic closes on a trade. Don’t worry, both stocks will be back up and ready for trading the following Monday, August 31 but at the new reduced price.
The good news is that both assets will again be available for trading at the opening bell the following Monday. So, no down time really for the assets. Keep reading for more good news. We have all the essential information for Olymp Trade clients that will answer these questions and more.
This article will give you a crash course in the basic mechanics of stock splits, some history about Apple’s previous splits (this is Tesla’s first), and even some great opportunities for trading that you might not be aware of.
What Happens When a Stock Splits?
A stock split might seem a bit confusing and many new investors can get bogged down in bad information about what a stock split is exactly and what will change. To put your mind at ease, nothing really changes regarding the company that issues a stock split.
The company’s value doesn’t change at all theoretically. Look at it this way — You have a $100 dollar bill/note cash, and you exchange it for two $50 bills/notes cash. You still have $100 dollars. You are no wealthier than before and no poorer.
When a stock splits, it does the same thing. It gives shareholders more shares in exchange for the one they already have. This is usually done on a 2:1 or 3:1 basis, but in the case of the Apple and Tesla splits it is a 4:1 and 5:1 basis respectively.
If a company’s shares split, the value of the shares at the time of the split is divided by the split amount. So, a stock trading at $100 that splits on a 2:1 basis would issue 1 extra share to every shareholder at the time of the split and the market price would change to $50 per share at the beginning of the next trading session.
Why do some companies choose to split their stock?
There are a number of reasons that a company might choose to split their stock, but the most common is liquidity and investor attractiveness. These are two ways of looking at the same thing really.
Liquidity means something can be bought and sold easier — turning it into cash (liquid). However, by the same token, if a company’s stock is cheaper (more liquid), then it will potentially attract more investors that couldn’t afford to buy 1 share of stock at $100, but CAN afford 1 share at $50.
This attractiveness of a smaller share price on a premium stock often drives the price upwards again, which adds overall value to the company even if its business model and practices haven’t changed at all.
Consider this — you already know that Tesla’s stock has risen to over $2,000. What is to keep it from rising to that point again? By lowering the price through a stock split, even an average investor can buy some shares of Tesla stock at $400 each.
However, not all companies are interested in such mechanisms as stock splits to drive value for their shareholders.
For instance, Warren Buffet’s company, Berkshire Hathaway, has insanely expensive shares. One single share of their class A stock is currently trading at over $300,000. Clearly, they aren’t interested in attracting small investors.
Apple’s Split History
Unless you’ve been living in a cave on an abandoned island for the last 40 years, you already know that Apple is one of the most successful companies in the world. Their innovations and quality products have made them a household name and part of a popular culture in general.
Apple likes to split their stock and this current split will be the 5th in their history. The company has publicly stated on many occasions that they want to be accessible for investors of all sizes and the splits have helped achieve that aim.
Nonetheless, it has certainly benefited the company in the long run as well as their shareholders. Apple has split the stock 4 times in its history. The last split was in June 2014 for a 7:1 split, but the company also executed 2:1 splits in 1987, 2000, and 2005.
100 shares of Apple stock in 1985 would now be 5600 and with the upcoming split, that number will move to 22,400 shares!.Keep in mind that 100 shares of Apple in 1985 would have cost you less than $50 and those shares would now be worth about $125 each after the split takes effect on August 28. Yes — $2 million off a $50 investment.
In the most recent Apple split of 7:1 in 2014, Apple shares were at nearly $700 each before the split, giving shareholders 7 shares at just under $100. Those $100 dollar shares are now trading at close to $500 each just 6 years later.
The chart below shows what has happened with Apple stock just from the announcement of the split at the end of July (3 weeks ago).
The bad news is that if you were looking to buy Apple before the split, you’re too late. The additional shares were issued on August 21 to current shareholders at that time. However, the actual price decrease doesn’t take place until the end of the market session on August 28.
Taking Advantage of the Split — Opportunity Awaits
The stock splits by Apple and Tesla are providing traders with loads of opportunities to profit off the volatility the splits are creating. Here are just some of the recent examples of market entry points for the two blue chip stocks.
Tesla announced its split on August 11. At the time of the announcement, the company’s stock was trading at $1370 per share. At the time of writing, it is now at over $2,000 per share.. That is an amazing jump of $600 in value per share in less than two weeks. Keep in mind that it is 13 real days, but only 9 actual trading days.
Tesla’s stock has become so expensive that even if it conducted its split at 5:1 at the current price, shares would still be over $400 each. That number may change before the market bell on Friday.
So, how do you actually make money off a stock split?
The good news is that stock splits bring price volatility. While we have seen Apple and Tesla stock rise as an overall trend for the last couple weeks, there have been great opportunities to capitalize on the pull backs.
Just last week Tesla experienced 3 short term reversals in less than 48 hours. Take a look at the 15 minute chart below to see what it looked like.
This behavior wasn’t limited to just Tesla either. Apple actually provided more volatility last week as the next 15 minute chart shows.
There is no reason to believe that this volatility won’t continue after each of these stocks reduce their price. In fact, we may see increased volatility as Bulls rush in to grab cheaper priced stock and other investors decide to cash in and take their profits now.
Keep an eye on your indicators to identify possible pullbacks like the ones shown above and you will be able to make some great Down trades followed by even better Up trades on the “bounce”.
The key thing to remember is that there are opportunities in EVERY market situation if you’re prepared to take advantage of them. The Apple and Tesla stock splits serve as a Golden Goose, and Olymp Trade gives you the tools, but only YOU can grab the golden egg.