This week, I thought it would be a good idea to bring back one of my favorite blog posts. Stock Splits & Mango Smoothie. Why? Since tech giants Amazon and Google received approval to reduce the purchasing price of their respective stock prices through a stock split, I said to myself. “Why reinvent the wheel on this one”
Join me as we take a brief trip back to 2020 when another tech giant, Tesla, received the same approval from shareholders.
STOCK SPLITS & MANGO SMOOTHIES
My son Pauly who is 6 years old absolutely loves luxurious cars to the point where he abruptly shouts out “Daddy look??!” referring to when he sees a Tesla, Ferrari or Lamborghini on the road. I realize that Tesla is not considered a luxurious car but try explaining that to a 6-year-old.
This week, Pauly and I were in the car together when he heard on the radio about Tesla and Apple’s recent stock split. Naturally, Tesla caught his attention, so he asked, “Daddy, what happened to Tesla?” This is what I said.
“Pauly, Tesla decided to split their company stock into 5 new stocks. You might not know what that means so here is an example of what the person on the radio is saying.
Pauly, do you like to eat apples?”
“YES” replied Pauly.
“So, if I cut your apple in half, how many pieces do you have?”
“2 Daddy.”
“That’s right, 2 pieces. How many apples did we cut?”
“1” replied Pauly.
“That’s right! We took 1 apple and made 2 pieces. You see the number of apples did not change, just the number of pieces changed. What Tesla decided to do is turn 1 share of the company into 5 shares much like the apple we cut into 2 slices. Does this make sense?”
“Daddy, can I have a mango smoothie?”
Stock Splits
All publicly traded companies including Tesla and Apple have a set number of shares that are outstanding. So, what is a stock split and why is it important?
A stock split comes down to a decision made by a company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. The reason why this happens is because the company is trying to make their share price more affordable to the retail market. In the case of Tesla, the share price before the stock split was over $2,000 which means that you would need to have $200,000 to buy a lot of 100 shares. That might not be an issue for the Ferrari driving crowd but for the average investor, it certainly is a deterrent.
Odd Lots
If the share price is too expensive, why not buy only a small number of shares instead? The answer is referred to as an odd lot. Allow me to explain.
An odd lot refers to a buy or sell order of a company stock that is less than the normal unit of trading for an asset. In other words, anything less than the standard 100 shares for stocks is considered an odd lot order. The downside of buying an odd lot order generally means the costs to acquire the stock can be slightly higher than the actual market price.
Publicly traded companies are aware of this dilemma and since they are competing with other publicly traded companies for investment capital, stock splits are important considerations.
What is this week’s takeaway?
Stock splits certainly catch the media’s attention and can be a sign of a company trying to position itself for future growth. Since stock split decisions are targeted to retail clients who probably do not have much buying power to invest in high-priced stocks, my view is that stock splits can be an effective tool to democratize wealth creation for more investors.
Just remember that if you cut 1 apple into 2 pieces, you still have 1 apple.
In the case of Pauly, you might have a mango smoothie.
Talk soon,
Michael
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I do hold a beneficial long position in the shares of TSLA, AMZN, AAPL, either through stock ownership, options, or other derivatives. I do not hold a beneficial long position in shares of GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.