Before the market opened on Monday 31st of August, both Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) enacted stock splits of 4-1 and 5-1 ratios respectively. But, what is a stock split?

A stock split, also known as a stock divide, increases the number of shares offered by a company. Stock splits do this by decreasing the market price of individual shares by the inverse ratio of the total share increase. Essentially what this means to an investor is this: Let’s say you own 10 of Company A’s shares worth $200 each and they want to enact a 4-1 stock split. The individual share price will reduce to $50, but you will now have 40 shares. Your personal capital investment in Company A has not changed, just as their market capitalization has not changed either.

But why would companies want to do a stock split? The purpose behind stock splits is often relatively simple, investor accessibility. The average investor cannot afford to buy Tesla stocks when they were floating above $2000/share, however, after Tesla completed a 5-1 stock split, an individual share is now worth only $500. Another reason some companies do this is internal employee bonuses, benefits, and stock options. Many tech companies, Apple and Tesla included, offer or outright give their employees shares in their company as part of a benefits package.

Back to Apple and Tesla, the immediate result after each respective stock split was a rise in stock price due to higher demand. Whether that demand was due to the hype surrounding the stock split or investors who had been waiting for Apple or Tesla to seem more affordable, who knows. Since the stock splits, both Apple and Tesla have taken blows of -5% and -20% to their stock price (as of 8 September 2020), neither of which is directly correlated to the increased availability of stock.

One thing to note, stock splits do not necessarily have to occur in public companies or in a manner that increased share offerings. Many private companies that have sourced private funding have done stock splits in order to be able to source further funding from smaller investors. One key example of this is when Facebook (NASDAQ: FB), enacted a 5-1 stock split on the 1st of October 2010. To hit my other point, reverse stock splits occur when companies want to raise the price of the shares and reduce the availability of shares. The most common occurrence of reverse stock splits is when companies are privatized from the public sector by an investor.