Dan Raju | Co-Founder and CEO | Tradier
The way retail investors reacted to the Apple (AAPL) and Tesla (TSLA) stock splits gives everyone a sneak peek into the euphoric state of investor sentiment that is at play in the market today. The way in which investors traded these securities is nothing short of a frenzy. It is easy for us to look at investor reaction to these splits in isolation, but what happened also has roots to what has been brewing over months. I think we may have to take a few steps back to Q4 last year to understand the buildup to this.
It started out with the announcements of commission-free trading in Q4 2019. The news drew tremendous interest from retail investors. This was followed by the rapid acquisition of TD Ameritrade and E*Trade. Then Covid-19 changed everything starting March 2020. Overnight the country had a home working, online workforce with time and money in their hands. The 24/7 news cycles of market volatility and bumpy markets totally eclipsed retail investors. Even normal market events were looked at by retail investors through a hyped lens and the markets reacted with extreme volatility. Younger millennial investors are enamored by massive changes in the stock prices of brands they associate with. The net result is that the pandemic created a larger, reactionary, and active online investor market that is highly engaged in the ongoing volatility.
Everybody knows that stock splits do not change the company fundamentals, and during normal times, stock splits rarely trigger any substantial retail response. During these volatile times, when popular companies like Apple and Tesla announce stock splits, it is read by investors in general as a bullish signal of where the market is going. It pushes them to react to it. To add to the sentiment, investors feel like they can now afford the split stocks and can do that without paying a commission. So the combination of the current mindset, lowered price and zero commissions is creating a greater interest in stock splits. We should not be surprised if a few other popular public companies look at the current frame in the market and decide to pursue stock splits.
Traders are hungry for content, trading convenience, curated news, and most importantly advanced education about these companies. In addition to placing simple equity orders, traders heavily employed options strategies to get interact and get an edge in the market.
Historically, retail investors have had mixed reactions to stock splits. The late 80’s and 90’s saw hundreds of companies execute stock splits. After the 2008 crisis, there was a substantial decrease in the number stock splits. The success of the recent Apple and Tesla stock splits may change this. In this pandemic driven market and hyper reactive investing environment, stock splits are more likely bound to create enhanced trading activity. In the short run, this may well encourage a few other companies who have been considering splits to take quick action. In the long run, as brokers begin offering ability to trade in fractional shares, it offsets the main reason for stock splits, since fractional trading makes a high stock price a non-barrier because traders can buy a fraction one share with a simple click.
Dan Raju is the Founder, Chairman & CEO of Tradier, a cloud-based financial services provider and brokerage API company for advisors, developers and individual investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.