Some of you may be wondering what a stock split is. Well on the 31st of August after many thought stock splits were dead, we have 2 major companies whose stocks will indeed be splitting. Year on year fewer companies seemed interested in splitting their stocks. There are pros and cons to this for companies, for everyday investors like you and me, and then for the industrial investors that do not have problems with access to money.
Many companies no longer like to do stock splits as studies suggest, if you make shares cheaper and more accessible to the everyday investor that would also make it more accessible to the day traders. This can create high volatility, meaning the value of the security, instrument, or share can go up and down dramatically, and with widespread over short amounts of time, in a positive or negative direction. This can create uncertainty in the stock price and investors could pull out, which company executives do not want.
In addition, having a high stock price does set the company apart, as it shows they are valued more than other companies in the present market, they have more prestige. However, appearances can be deceiving, you should actually look through the company’s accounts, PE ratio, an asset to debt ratio, and many other statistical ratios, and indicators, to see who is actually running their businesses well, and has the most value, or is undervalued. Presently, Amazon share prices are an astonishing $3,400.42, whereas Apple, is only $500.19. But did you know Apple is actually doing better than Amazon?
Apple made history twice in a short amount of time. In July 2020, Apple became the most valuable company in the world, after its third-quarter earnings report was very strong, and surpassed the Saudi state Oil giant company, known as Aramco. 2 years before this, Apple also became the first U.S company to reach a $1 trillion market cap. A market cap shows the total value of all a company’s shares of stock. It looks at what the price of stocks currently is, and multiplies this by all the stocks the company has, including outstanding stocks. It also highlights the company’s future prospects, as it shows how much investors are willing to pay. Currently, Apple being the most valuable company in the world, has a market value of $2.140 trillion. Whereas, Amazon is behind with around $1.705 trillion, and Tesla is only $418.57 billion.
Some say, Amazon’s boss is very competitive. This may mean there may be future stock splits from Amazon. In 2017, Jeff Bezos the Amazon CEO, (whose name I never knew till now), said he would not rule out another stock split, but they were not imminent. There is also speculation in order for Amazon to be able to be added to the Dow Jones Industrial Average, which is a very famous stock index of how 30 huge companies are performing as a collective; they would need to do a stock split to be even able to be given an invitation, possibly a 20 to 1 stock split.
The Dow Jones is like an exclusive club for blue chip stocks, (companies with the best reputation in good and bad times, having quality, reliability, and profitability); they actually kicked out their last original member in 2018. General Electric, the same company founded by Thomas Edison and Charles A. Coffin, after one hundred years they were shown the exit. Do you think its fair schools don’t tell us much about the real originator of the light bulb? We always are told about Thomas Edison, when in fact it was an African American inventor and patent consultant known as Lewis H. Latimer who wrote the book and then was later hired by Edison to help him.
Interesting enough Microsoft have also been in many disputes over the years, with claims of idea theft and copyright. Kildall claimed MS-DOS came from their CP/M. Bill gates used to work for Apple and when he came up with Windows in 1985, Apple sued him for stealing the feel and theme of the Mac operating system. In 1996, developers claimed they took a web widgets idea to Microsoft, which was then stolen. However, I digress. Microsoft has actually had 9 stock splits, in 2003 was it’s last. 4 splits for Apple, last in 2014. 3 splits for Amazon, last was in 1999. Whereas, this will be Tesla’s first split.
If you invested $10,000, 10 years ago, in Microsoft shares, they would be worth $116,657.37, with an average annual return of 27.17%. If you invested $10,000, 10 years ago, in Apple shares, they would be worth $152,160.64, with an average annual return of 32.27%. If you invested $10000, 10 years ago, in Amazon shares, they would be worth $271,874.85, with an average annual return of 32.27%. If you invested $10,000, 10 years ago, in Tesla shares, they would be worth $1,092,734.03, with an average annual return of 58.76%.
The figures above, take into account what their share price was 10 years ago, and what it is today, alongside all stock splits and possible dividend payments. You may have noticed Tesla investors would be millionaires right now, this is due to the fact Tesla stocks have grown 822.27% in just 1 year, whereas Apple grew 134.11% and Amazon was only 81.88%. I say only, but this is amazing growth especially with COVID-19 and the rapid fall of the stock market. The UK officially went into recession on the 12th of August, after 11 years of being free from one. Part of these growth surges from Apple and Tesla, came from them announcing stock splits. But what are stock splits, and why would this cause a surge?
Stock splits are when a company divides one share into multiple shares, which means the price of 1 share then becomes a lot cheaper. For example, Apple will be doing a 4 for 1 stock split. If 1 share cost $400 now, those with 1 share will now find they have 4 shares, and those that want 1 share will only need to pay $100. Tesla is doing a 5 for 1 stock split. Their $2000 current share price, will become priced at $400, but those who had $2000 shares, will now own 5 shares instead of 1.
Some companies do this to increase their stock liquidity, which means how easy it is to buy and sell their shares, without it affecting the asset price. Studies also suggest, companies have a “sweet spot”, that they want their shares to trade at. When they do stock splits, it shows they have confidence their stocks will continue to rise above their sweet spot. This is why some analysts believe, its worrying companies have stopped doing stock splits, it may mean they have no confidence in their companies, or control of stock prices. Others suggest, it is more to do with the market being controlled by rich industrial investors, and investing is no longer meant to be accessible to smaller investors, in order to control the market.
There are many arguments, regarding whether you should buy stocks, before or after a split, and also whether a split even changes anything. A company split does not actually change how much your stock is worth, or really show how well a company is doing, or will be doing, yet many investors get excited and do become interested in companies when they announce this. Many investors and speculators advise against joining in, as this may be a bubble (a rapid increase in prices, due to demand speculation, that will not continue in the long run). However, although I am a novice I cannot help but be excited at Apple, Tesla, Microsoft, Facebook, AMD, NIO and Amazon as in these current times technology companies are very exciting companies to be looking at, when considering passive investment; especially after understanding what these companies actually do, what their books say they do and will do, and what experts project is possible they will do, and if it is likely their sales will increase as they project it to, through all the other more unknown areas these companies are involved in.
You may be wondering why I am counting Tesla as a tech company, when they make cars, there is an ongoing debate about this very issue. However, what makes Tesla stand out from its competitors, is the fact they make software for their cars in house (which is very important when looking at businesses), and they are ahead of other manufacturers because of their technology department. Another study suggests, this is just like Apple and Nokia may have been in the same business, but it is because of Apple’s technology, why they are leading the game and Nokia is nowhere to be seen. Therefore, we shouldn’t downgrade a car company that has its success due to it being in the technology business. Even Amazon’s boss has made his profits real, by cashing out billions of his shares, as the share prices surged during the pandemic, and he plans on investing in his space travel company known as Blue Origin.
It is exciting times in the passive investing world, and I personally am happy with my purchases, and I hope in 10 years’ time I will see the types of returns I mentioned above. However, there is a saying by Warren Buffet ‘Be fearful when others are greedy, and greedy when others are fearful’. What do you think about this saying? And what do you think about Amazon, Apple, Microsoft, Facebook, AMD, NIO and Tesla, as I know there are further discussions I will delve into about the ethics of these companies?