Maybe it sounds completely crazy that Tesla boss Elon Musk would like to beat his share price down. Musk would rather see the price at around $300 instead of around $900. What initially seems absurd could be interpreted by investors as one of the many fixed ideas in the head of the controversial manager. But just many investors praise Musk’s plans. Crazy stock market world?
What Musk is planning is a popular stock market trick: from an expensive Tesla share at a current value of around $900, the company manager wants to make three shares on Wednesday evening after the stock market in the USA closes – each worth around 300 euros. “One makes three is the motto,” says stock market expert Stefan Risse from asset manager Acatis.
The bottom line is that nothing changes for investors in such a stock split. Even if each share is now worth less individually, the value of all shares together remains the same. What looks like a zero-sum game from an economic point of view, however, sparks great hopes among private investors. Analysts at Bank of America have analyzed all stock splits in the US leading index S&P 500 since 1980 and found something amazing: In the twelve months after the split, company prices rose by an average of 25 percent – but the US leading index only rose by 9.1 Percent. “That’s a lot,” says tech expert Daniel Kröger from the fund company Ehrke and Lübberstedt.
Although a split changes nothing economically, it makes the shares visually attractive, especially for private investors. After all, many share savers shy away from expensive shares because shares for several hundred euros are sometimes simply too expensive for them. Even if some US brokers are already offering their customers to buy just one hundredth of a share – these offers have not yet caught on. “If prices are lower, more private investors can jump on the bandwagon,” says equity strategist Stefan Riss.
Few individual investors buy stocks priced at $1,000 or more
The fact that the prices of the relevant companies after the share split rose significantly more on average than the leading US index S&P 500 is likely to have something to do with their history. Companies whose price is listed just below thresholds such as $1,000, for example, and which has already risen sharply in the past, opt for a stock split particularly often. “Many of the stocks had a run beforehand and were trending,” says equity strategist Riss.
In addition, a bit of psychology plays a role in the purchasing decisions of many private investors: “It is no coincidence that Tesla is splitting just under the $1,000 mark,” says equity strategist Risse. Even if the pure price in euros or dollars does not say anything about the intrinsic value of a share, even experienced investors are often subconsciously controlled by such psychological effects – and would perhaps stop buying above 1000 dollars.
Private investors are particularly important for Tesla, because while large tech companies such as Apple, Amazon or Google’s mother Alphabet have between 60 and 85 percent of the titles in the hands of large institutional investors, Tesla only has around 45 percent. Many investment professionals worry about the supremacy of the erratic company leader Elon Musk and therefore shy away from the volatile share. “Tesla therefore always has to do a lot of PR with private investors to push the course,” says tech expert Kröger.
The true impact of stock multiplication may be more psychological
However, more and more market experts are questioning whether the narrative of the mass private investor purchases is correct. This is shown by analyzes by the US stock exchange operator CBOEthat investors were suddenly trading almost three times as many shares in the first week after a stock split. However, the effect is purely visual, after all, after the share multiplication, there are significantly more papers of the respective company. When the experts calculated the effect of the stock split, the unexpected became apparent: the bottom line was that investors only traded around ten percent more shares of the companies concerned in the week after a split, and just two weeks later the effect has mostly fizzled out completely. Many private investors buy before the stock split: “They drive prices up with large purchases after the stock split has been announced until it is completed,” says Angus Hume, who deals with the investment behavior of private investors at the analysis company Vanda Track.
So while the actual effect on buyers may be limited, the true impact of stock multiplication may be psychological. Companies use stock splits to get people talking, the media report on the current situation, and analysts have to update their reports. In addition, there is a gap between buying and selling prices for stocks with lower prices tends to be smallerso that investors incur fewer costs when trading – which could also drive prices to some extent.
In addition to Tesla, the online retailer Amazon, the Google parent company Alphabet and the software provider Shopify have already tasted their shares this year and have divided their shares. Amazon and Alphabet each made 20 shares out of one share, while Shopify made ten out of one paper. Based on these individual cases, however, it is not yet possible to speak of a trend. Between 1997 and 2000, there were far more than 60 stock splits a year at the height of the dot-com euphoria on the stock exchange. “A trend towards splits is no guarantee of a crash in the overall market, but it is an indicator of a crisis,” says tech expert Daniel Kröger from the fund company Ehrke and Lübberstedt.
Some companies therefore do not even think about a stock split, even if their stocks have long since become unaffordable for private investors. Shares in the Swiss chocolate manufacturer Lindt, for example, already cost 108,000 francs on the stock exchange. Just like the chocolate, the share should also be a premium product, it was once said from the group’s headquarters. Dividing it into pieces should actually be part of everyday life, especially for chocolate makers.