Apple and Tesla—two of the biggest tech companies in the U.S.—announced that they would split their stock, giving investors extra shares. 

Apple, which recently became the first company to reach a $2 trillion in market cap, said that it will execute a 4-for-1 stock split, meaning that investors will receive three additional shares for each one they own. The stock split will go into effect for existing investors on August 24th, 2020 and shares will start trading at the split-adjusted price on August 31st

A few weeks later, electric carmaker Tesla also said it will carry out a 5-for-1 stock split. This split means that investors will get four shares of Tesla stock for each one that they own. The split will go into effect for those who are already invested in Tesla on August 21, 2020. The stock will start trading at the split-adjusted price after August 31, 2020. 

Here’s how a stock split works, and what it means for investors.

How a stock split works

When a company decides to split its stock, it’s literally doing just that—breaking stocks into additional shares.

Public companies have a finite number of shares or a total number of shares that they can sell to their stockholders. A stock split increases the number of shares on the market by splitting the current outstanding shares into more shares.

When a company decides to split its stock, it will do so according to a ratio, expressed as X:1, or X for 1. If the ratio is 2:1, or 2-to-1, each share will split into two. 

A stock split reduces the value of each share. For example, in a 2 for 1 split, each share will be worth 50% of the original, single share’s value. But that doesn’t necessarily mean the investment loses value since the two new shares combined have equal value to the original share.

Typically, a company will split its stock when its share price has become so high that smaller investors can’t afford the price of a single share. Some companies today, for example, have stock prices in the hundreds, thousands, or even hundreds of thousands of dollars per share. By increasing the number of shares, or increasing supply, a public company can bring the stock price down without affecting a company’s total value, or market cap.

In the case of Apple, the stock price is around $466 per share. When the stock split goes into effect, the price will be divided by 4. This will be the fifth time Apple has split its stock since going public in 1980. Apple last split its stock in 2014, in a 7 for 1 split. 

Tesla’s stock is trading at around $1,900 per share as of August 19, 2020. The company’s split will divide its share price by 5 when it goes into effect.  Keep in mind that a stock-split doesn’t necessarily mean that the same growth will follow. 

How a reverse stock split works

A reverse stock split has the opposite effect of a regular stock split—it reduces the number of outstanding shares on the market.

When a reverse stock split occurs, each share is converted to a fraction of a share. For example, if you own ten shares, and a reverse stock split occurs that converts each share into 0.1 shares, your ten shares becomes one.

The result is fewer, but more valuable shares. A company may want to increase the value of its shares to avoid being delisted from stock exchanges, in the event that its share price is too low, or to boost its image.

Keeping up with stock splits

Some experts have suggested that the stock splits from Apple and Tesla might inspire other companies with high share prices to split their stocks. For example, Netflix, which last split its stock in 2015, is trading around $500 per share. Amazon, which last split its stock in 1999, trades around $3,300 per share. However, these companies haven’t said that they will split their stocks and there’s no reason to believe that they definitely will.

Stay up-to-date with stock split news—and other market news—with our news update the Weekly Scan and our newsletter The Wallet.

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