Tesla (TSLA -3.90%) and Apple (AAPL -1.41%) made headlines recently when the two companies announced upcoming stock splits in an effort to make their shares available to a larger base of investors. Both companies' stocks have run substantially higher over the past 12 months, partly explaining why a stock split made sense for them. Apple and Tesla shares are currently trading at about $497 and $2,050, respectively. Stock splits would make the two stocks easier for individual investors with smaller amounts of capital to buy.
But how will the two companies' stock splits work? And should investors buy Tesla and Apple stock because of their upcoming splits later this month?
How will the shares be split?
As if the companies coordinated their stock splits, both Apple and Tesla stocks will begin trading on a split-adjusted basis on the same day: Aug. 31. Tesla shares will be split into five, while Apple stock will see a four-for-one split.
What might this look like? The price of the split shares will depend on what the two stocks are trading at the time of the split. To illustrate what it might look like, we can use the two stocks' prices today. For every $497.48 Apple share an investor owns, he or she would now own four $124.37 shares. Tesla shareholders would own five $410.00 shares for every $2,050 share they have at the time of the split.
Stock splits don't make Apple and Tesla better investments
Based on the two stocks' soaring prices since their recent stock splits were announced, a novice investor might mistakenly believe that stock splits make shares fundamentally more attractive. But this isn't the case. The total market value of a company is the same whether its shares are split or not. Here's another way to think of it: the value of an individual investor's holdings will not change because of a stock split -- they will simply own more shares at the new, split-adjusted price.
Sure, a case could be made for a potential hike in demand for Apple and Tesla stock because of retail investors with smaller sums of capital flocking to buy shares after their splits. But savvy investors know that, over the long run, a stock price is ultimately driven by the underlying performance of the business. Therefore, if shares rise to irrational levels because of a stock split, some investors may be prompted to sell the stock and take profits, ultimately balancing out demand.
There's no telling what direction Apple and Tesla shares will trade during the coming weeks. Investors should remain focused on the two stocks' underlying businesses, their long-term potential, and valuations.