Stock split and your portfolio.

The stock split of Apple and Tesla has been an issue for a months to the investors; the novice in investment field could be confused with it (delusion that price can be looked cheaply) even though there is not much of a change in a system. When company announces to split its stocks, then it can entice the media and attract investors to buy the shares in nominally cheaper price.

Stock splits have not much proceeded in recent days as it was not corporate playbook. After the dot-com crash in 2000, stock splits by S&P 500 companies became obsolete, while Dow Jones Industrial Average are much less frequent. Stock splits used to happen when shares reached above $100 in the past, however brokerages like Charles Schwab Corp started giving the options to clients for buying a fraction of shares in $5. 

Stock split
Wikipedia explains that "stock split or stock divide increases the number of shares in a company. A stock split causes a decrease of market price of individual shares, not causing a change of total market capitalization of the company." (Different idea against paid-in capital increases)

Shareholders of companies will receive more stocks (the total value does not increase) when shares go into the split. For example, when the company announces for 4-for-1 stock split, then three additional shares will be granted to each investors. So if the previous price was traded in $400, then it would be $100 aftermath.

Company dividend
Board of the company decides what to do with dividend. Normally, dividend is also divided as the ratio of stock split. For example, imagine there is a company which gives a dividend of $1 per share. If the stock is split into 1/4, then the dividend will be from $1 to 25 cents.

Options bets
Option contracts held at the time of division are recalculated through a process of "being made whole". Options Clearing Corp has rules and procedures in place to modify the contract so that the holder is not affected by the division. The contract is adjusted to reflect the new price and number of shares, but the value remains the same.

Dividing it by one to four, a call option contract that covers 100 shares at the strike price of $100 each will cover 400 shares at the strike price of $25.

Fractional shares
Again using the example of a 4-for-1 split, investors who hold less than one share ahead of the split will receive three additional fractional share equivalents. An investor holding half a share before the split will end up holding two shares after the split. An investor holding a quarter of a presplit share will end up with one share afterward. Anyone with less than a quarter share will hold a fractional share following the split.

Benefits for corporate
Company just offer lower stock price and more shares. Above that, there is nothing. It does not affect the value of company at all. However, stocks price usually pop out in short-term as history says. Stocks in Nasdaq rose 2.5% at sight right after announcement of stock split and S&P 500 soared 5% in the year. Apple has added 30% since July 30 after the unveiling of stock split, whereas Tesla's share has climbed 61% since August 11th after announcement.

"Many investors say the outsize reactions to those splits reflect factors including novice traders’ embrace of technology favorites during a year of pandemic-related disruption and the perception that a stock split ratifies a firm’s perceived competitive strength." as Wall Street Journal says.

Stock market
Mostly, there is not much of an impact on overall stock market. The S&P 500 index is followed by corporate's market capital, which means that firm's market value is leading the index. However, the Dow Jones Industrial Average is different. Dow is price-weighted index. The index is followed by the nominal price of the shares. This means that if the index is composed of nominally high value, then it is easier to move upwards when shares rocket up. Blue-chip companies' stock split won't do good influence on Dow since bigger share value rise influences more on index moves.

Popularity
Splits are not a fad now despite the announcement from Apple and Tesla. About 41% of stocks in S&P 500 are trading above $100, which was considered high enough to be split. There are 3 plans for stock split, which as 102 in 1997, seven companies 4 years ago. (Schwab) Alphabet and Amazon have not split its stocks for 20 or more years. Berkshire Class A has never been split after its foundation. In 1996, Berkshire Hathaway created another class to help individual investors to trade in around $200. It was split in 2020.

Stock split in the past
Stock splits were more likely to happen in the past since the trading wasn't very well developed. It wasn't traded quickly by digital system and was expensive to small individual investors. Normally in the market, when buyers purchase in large quantity, then the compensation of it can be discount. Investors willing to buy 100 shares at a time, then the commission fee could be discounted. Commission fee is not a big problem contemporary, due to the development of digital trading system. Target Corp and PepsiCo denied of stock split with these reasons.

Options for the stocks that are not split
They have three options: paying up; buying shares of other firms that trade for less; or purchasing a fraction of a share, an alternative recently offered by some retail brokerages. Fractional shares are not the real share. It is a product from brokerage to help investors to buy cheaply. Proportional dividend and voting right can be performed in accordance in the contract.

Source: https://www.wsj.com/articles/what-is-a-stock-split-and-how-does-it-affect-your-portfolio-11598616477