This Month's Stock Split – What Does it mean for Traders?
As part of this blog we will be concentrating on two of the most popular stocks of 2020 so far, Apple and Tesla. Both stocks have seen remarkable growth since the Stock Market crash in March this year.
Apple increased from $224 per share to a high of $500, which is its highest price since its existence. Tesla has gone from a low of $361 in March to over $2,000 per stock this month, which again is the highest in its existence.
However, this month we are going to see something new happen to both Apple and Tesla stocks which doesn’t happen very often. Both stocks are going to incur what is known within the financial market as a classic Stock split. In this blog we are going to look at how this works and what it actually means for traders.
What is a Stock Split?
There are two types of stock splits. The first is a classic stock split which means each stock will be split so there are more stocks available. For example, if a company has 1 billion stocks available worth $1,000 each and they are splitting each stock into 4, it would mean there are now 4 billion stocks available worth $250 each. Therefore if you had 1 stock before, you now have 4 stocks.
However, the overall value of the now 4 stocks you own will stay the same, equalling that of one single stock from before the split (not taking into consideration standard price movement).
Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors that are trying to stay diversified. The idea is to keep the demand for the stock high and to stay attractive to both smaller and larger investors. It is also normally a sign that the company does not expect the price of the stock to fall anytime soon otherwise they would not go through the trouble of splitting the stock.
The second type of split is called a reverse stock split. A reverse stock split is when the company consolidates the number of existing shares of stock into fewer, proportionally more valuable, shares. The process involves a company reducing the total number of its outstanding shares in the open market, and often signals a company in distress.
Please note Apple and Tesla are both about to experience a classical, not reverse, stock split.
Apple had a 4-for-1 stock split on 24th August, and Tesla had a 5-for-1 split for stockholders on record on 21st August. Both Stocks will be available on a stock-split adjusted basis from Monday 31st August.
eXcentral will set a closing date for these assets on 28th August 2020 at 23:00 GMT+3. This means that all open trades and pending orders will be automatically closed on Friday’s market closure.
Both Stocks will be available for trading again on the 31st of August. Moreover, both above mentioned stocks will be traded on a “Closed Only” basis for the trading day 28th August 2020.
To put it simply, if you place a trade anytime between now and close of business on Friday, August 28th, then you’ll be trading the pre-split shares. However, if you buy from Monday onwards you will be speculating on the price movement based on the post-split value. If you want to trade post-split shares, you’ll have to wait until August 31st.
After the split, Apple will be priced approximately $125 per stock and Tesla approximately $406.
Overall, traders should note that while a classic stock split leans more towards bullish fundamentals, it does not guarantee the future performance of the stock. For example, Tesla had announced that car sales in China have dropped by almost 25% in the month of July.
Information and fundamentals such as this can cause a strain on the price of the stock as well as the demand. Therefore it’s important to note the stock split’s importance, but at the same time continue with your analysis of both the fundamentals and technical elements of the firm and price movement.