Apple Inc Splits Stocks
Recently, Apple (NASDAQ:AAPL) made a move that caused a bit up an uproar among financial analysts. What they did is called “share dilution” or “stock splitting”, and in simple terms it means they’ve done a little financial juggling to bring down the cost of each share so more investors will jump onto their wagon. Whereas individual shares cost more than $600 before the move, they’re now priced at under $100.
Is this good news for aspiring investors, or is there going to be a catch somewhere down the road? This article will help you get things in perspective.
What exactly happened, and why does it matter?
This 7:1 stock split had been previously announced, and took place at the close of US markets in June 6, 2014. At this time, 6 new stocks were introduced by the company for each stock already in existence. What this means in practice is the cost of individual stocks was divided by seven. It doesn’t mean that individual stocks became cheaper, thought… nor did they get more expensive.
The price/value remained exactly the same in the moment before and after the split. If you had 100 stocks before the split, they instantly turned into 700 stocks after the fact. So what was the point of this maneuver? According to financial analysts, it’s mostly a psychological maneuver… one that may actually backfire against the technology giant.
What is this all about a psychological-financial play?
Simply put, the cost of individual Apple shares was getting so high that common investors were starting to find the price tag a bit daunting. Going for nearly $700 each share, the perceived cost was too high for the everyday casual investor. What the firm did was increase stock granularity, which means making individual shares more appealing by changing their relative price: 7 times more shares at 1/7 the cost.
This move isn’t actually anything new. Many companies – especially in the technological fields – tend to split stocks when the cost of each share gets seemingly too high. Microsoft, for example, has done it 9 times since its shares went public, back in 1986. This tactic is used to advance the value of the shares across a rut, since the apparent reduced price tens to bring new investors on board by stimulating the exchange of shares after the fact.
How did the market react after the split?
Understandably, somewhat predictably, the market reacted like a rollercoaster in the aftermath of the split – first peaking, then dipping, eventually stabilizing with a noticeable increase compared to the value before the split. The following graphic provides an overview of the recent developments:
So, is this a good time to buy AAPL?
Yes and no. The key piece of information you should take away here, is the split didn’t change the actual value of the stocks: it just enticed trade by luring in novice investors with an apparently lower cost. Sensible investors should think long term though, and buy shares because they believe in the company they’re investing in – not because they imagine it’s suddenly a bargain sale.
In any case, this could be a potentially good investment opportunity since it allows accumulating more shares at lower cost. The stocks will likely keep rising in price, now the perceived barrier of an extremely high cost per share is out of the way. If Apple keeps performing well and controlling its markets as usual, their trade value should rise consistently. The recent seven-fold multiplication of shares brought about by the dilution may very well pay off dividends in the future as this scenario unfolds.