Stock splits: playing to the Robinhood crowd

In theory, stock splits should not alter the value of a company. Investors swap one share for a larger number of shares and the price is divided accordingly. That leaves the market capitalisation of the business and the value of each shareholder’s investment unchanged.

Yet the shares of Tesla and GameStop, a video game retailer favoured by meme traders, lurched higher after they announced plans for stock splits. Tesla’s market value has risen by a whopping $72bn since Monday.

The US electric carmaker has given no details on the ratio and timing of the split. Tesla simply said in a filing that it would ask shareholders to approve an increase in the amount of common stock it can have outstanding at its next annual meeting

The moves come just weeks after tech giants Google parent Alphabet and Amazon both unveiled plans for 20-for-1 stock splits.

There are no logical reasons to why a stock split would add the value equivalent of General Motors to Tesla’s market value. After all, investors who cannot afford the stock’s high price can always buy cheaper fractional shares instead.

The price moves reveal that US markets are less rational than economists pretend and that retail investors play a powerful role in them.

Prior to 2020, stock splits had fallen out of fashion. The number of share splits among companies in the S&P 500 hit a high of 102 in 1997, but dropped into single digits from 2016, according to data from S&P Global.

Apple and Tesla helped revive the practice after splitting their shares in 2020. The return of stock splits coincided with a stampede into the stock market by retail investors during the pandemic. They opened more than 25mn new brokerage accounts over the course of 2020 and 2021, according to JMP Securities.

Stock splits make shares that have high entry prices look cosmetically cheaper and more accessible to retail investors. They also permit easier trading in options — which exploded in popularity during the pandemic.

Whether being able to buy Tesla shares and options more easily is worth the extra $72bn in market value is debatable. But fundamentals have never been the focus of the meme stock trading crowd.