Do you know what happens when a company like Apple decides to split its stock?
This past year, we saw multiple public companies announce a stock split. This news could have newbie investors wondering about what this meant for their investments.
When considering a stock split, we must also understand the long and short-term implications on an investor’s portfolio.
But what exactly is a stock split, and how will it affect your investments? In this article, we will explore what would happen if Apple splits its stock and what it could mean for you as an investor.
What is a Stock Split?
A stock split is a way for a company to increase the liquidity of its shares by dividing its existing stock into smaller shares. The split doesn’t change the company’s underlying value, but it does increase the total number of outstanding shares. As a result, when a stock splits, the price per share decreases while the number of shares increases, usually in ratios of 3-for-1 or 2-for-1.
Let’s look at an example to understand stock splits.
Assume a company has 100 shares outstanding, and each share is worth $10. If the company were to announce a 2-for-1 stock split, this would double the number of outstanding shares to 200. However, the price per share would halve to $5.
So, even though the total value of a shareholder’s investment remains the same, they now have more shares in the company at a lower price per share.
What Does Apple’s Stock Split Mean for You?
A stock split by Apple could have both short-term and long-term implications for investors.
In the short term, the split could lead to a decrease in the stock price and an increase in the number of shares owned by investors.
Let’s say Apple announces a 4-for-1 stock split. Investors who own Apple stock before the split now own four times as many shares at a lower price after the split. If Apple’s stock price increases after the stock split, it would mean that you will benefit from an increase in their portfolio values.
In the long term, more investors may be able to purchase shares due to Apple’s stock price decreases. This will result in an increase in demand and potentially an increase in the stock price.
Why Do Companies Split Their Stock?
Companies like Apple may choose to split their stock for a variety of reasons. Below are a few reasons why companies may split their stock:
- To make shares more affordable: By splitting a company’s stock, it can make the price per share more accessible to investors with smaller budgets. In Apple’s case, this can increase demand for Apple stock, which can drive the price higher over time.
- To increase liquidity: By having more available shares on the market, it can increase the number of buyers and sellers for the stock. This can help increase trading activity and the overall liquidity of the stock, making it easier to buy and sell shares. Additionally, increased liquidity can attract institutional investors to carry out bigger trades with more shares in play.
- To signal confidence: Stock splits are often a sign of confidence in the company’s future performance. This can attract more investors who are looking for opportunities to invest in companies with positive prospects and future growth.
- To make the stock more attractive: When a company splits its stock, it can make it appear more attractive to individual investors and institutions by making it seem like a better investment opportunity. Stock splits can positively affect a company’s public image and stock profile. In the past, companies have split their stock to maintain share prices below $200 to appeal to a broader range of investors.
What is a Reverse Stock Split?
The opposite of a traditional stock split is a reverse stock split. A reverse stock split results in a decrease in outstanding shares and a higher price per share as opposed to more outstanding shares and a lower share price.
For example, let’s say a company has 1,000 shares outstanding and the stock is trading at $1 per share. If the company announces a 1-for-10 reverse stock split, this will decrease the number of shares outstanding to 100, but the price per share would increase to $10.
The reverse stock split is usually used when the price of a company’s stock has fallen too low, making it less appealing to investors or potentially delisting from a stock exchange. Often, reverse stock splits indicate low market capitalization for the company, which can indicate financial distress for the company.
By consolidating shares and increasing the price per share, a company can make its stock more appealing to investors and improve its perceived financial health.
The Effect of a Stock Split on Share Value
The effect of a stock split on share value is a hotly debated topic. On one hand, efficient-market zealots such as Eugene Fama have argued that there should be no “alpha” to harvest and no chance for an investor to profit from a stock split. This view has been held since 1969 and is still widely accepted today. Many experts warn investors against buying low-priced shares after a split, claiming that it will only lead to short-term gains at best.
However, recent cases such as Apple and Tesla have shown that stock splits can actually lead to extraordinary returns. This suggests there may be more to the story than traditional market theory suggests. Investors may benefit from stock splits if they identify the right opportunities and act quickly.
When a company splits its stock, the total value of the company remains the same. However, the number of shares outstanding increases, and each share is worth less than before. This can affect the share price as it may increase due to higher demand from new investors attracted by the lower price per share. Additionally, larger institutional investors may be more likely to invest in a company with a lower share price.
How Many Times Has Apple Split Its Stock?
Apple’s stock has split five times since the company went public in 1980. Apple’s stock split history is as follows:
- June 16, 1987 – the stock split on a 2-for-1 basis
- June 21, 2000 – the stock split on a 2-for-1 basis
- February 28, 2005 – the stock split on a 2-for-1 basis
- June 9, 2014 – the stock split on a 7-for-1 basis
- August 28, 2020 – the stock split on a 4-for-1 basis
Apple’s split strategy aims to make the stock more accessible by reducing its price per share. Over the years, multiple stock splits have made it easier for all investors to buy shares in the company. This strategy also increases market liquidity and benefits both shareholders and potential investors.
Should You Buy Apple Shares Before or After a Stock Split?
Timing of the purchase in relation to the stock split may not be the most important factor when buying Apple shares. As discussed earlier, a stock split does not actually change the overall value of a shareholder’s investment — only the number of outstanding shares and the price per share.
However, if you anticipate that the stock split will make Apple shares more attractive to a wider range of investors, this could potentially drive up demand and the stock price. If this is the case, buying before the stock split could be beneficial.
On the other hand, if you think the stock split will not have a big impact on the demand for Apple shares or the stock price, the timing of your purchase may not be as important.
Several factors can influence the stock market and individual stock prices, so it’s difficult to predict with certainty what may happen after a stock split. It’s crucial to conduct research and consult with a financial advisor before making any investment decisions.
The purpose of stock splits is to make shares more affordable and more marketable for companies whose share prices have increased. Although the number of outstanding shares increases and the price per share decreases, the company’s value remains unchanged. When done correctly, stock splits can benefit both companies and investors.