Apple has announced that it will be conducting a 4 for 1 stock split on August 24. Below, I will explain what a stock split is, how it works, and how it affects Apple and its investors.
What is a stock split?
A stock split is what happens when the board of directors of a publicly-traded company decides to increase the set number of outstanding stock shares by issuing more stock directly to current shareholders. How do stock splits affect the stock’s price? After a stock split, the stock price will be reduced because the stocks price reflects the total value of the whole company divided by the number of outstanding shares. Since the number of shares outstanding increases during a stock split, the value of each share must decrease by the same amount after the split. Apple currently has about 4.334 billion individual stock shares outstanding, with each of those shares valued at about $411.
As a result of Apple’s split the number of outstanding Apple shares will increase by a multiple of 4, meaning Apple will have quadrupled its outstanding shares to a whopping 17.337 billion shares (4,334,000,000*4 = 17,336,000,000). Because Apple is doing a 4 to 1 split, each one of it’s $411 stock shares will be converted into four shares worth $102.75 each, meaning that the total dollar value invested in Apple will remain the same compared to pre-split value. Simply put, the split does not positively or negatively affect investors.
How stock splits work:
For simplicity purposes, let’s pretend that you buy one share of Apple stock today and that one share of Apple stock will cost you $411. For the sake of this example let’s also pretend that the value of the stock stays at $411 for the rest of the month. In real life, stock prices will rarely ever stay the same but for this example let’s pretend that Apple’s stock price remains $411 until August 30 when the three step stock split has been completed.
The stock split process:
- Before the split, 1 share of Apple is Worth $411.00
- Step 1: After the market closes at 3:59 pm on August 24, when you look at your trading account you will have received three additional shares of Apple stock. Your account total will still be worth $411 total; however, the value of your original single Apple share and the value of each of the 3 split shares will have instantly changed to $102 each.
- Step 2: The market re-opens at 9 am. You can trade stocks as normal but Apple stock will most likely not be available for trading while the split is in process.
- Step 3: Apple stock will begin trading on a split-adjusted basis on August 31. Trading of Apple stock will resume as normal and all Apple shares will cost approximately $102.75.
- After the split: The original Apple share, now worth $102.75, + split share 1 worth $102.75 + split share 2 worth $102.75+ split share 3 worth $102.75 = total Apple stock holding $411.00.
How this affects the stock:
Stock splits are pretty cool but in the grand scheme of things they don’t mean much or create any value. Stock splits are essentially the same as taking $1 (paper dollar) to the bank and asking them for 4 quarters ($1) in return. A stock split benefits Apple because it helps Apple attract retail investors like you and me. Because each investor gets one vote for every share they own, Apple believes that increasing the amount of real people who buy their stock will help the company make better decisions and help prevent institutional investors (banks, investment firms, activist investors) from bullying Apple into making bad decisions. Institutional investors tend to be more concerned with profit than they are with how well the company is run or the quality of products it produces.
Limiting the power of institutional investors prevents them from bullying Apple into making business decisions that increase profit but negatively affect consumers. Stock splits benefit the stockholder by making it easier to distribute the stock evenly or sell a portion in the same way that it’s easier to split a dollar between your four kids using quarters or faster to buy a bag of chips with exact change. Imagine trying to split one share of Amazon stock, which cost $3,051.88 per share, between four people. Imagine that you needed $1,000 to pay an unexpected bill, how inconvenient would it be to have to cash in (sell) $3,000 worth of stock just to free up $1,000?
Apple has split its stock four times before in an effort to keep its stock price around or below $100 because they believe that keeping the stock price around $100 will entice retail investors, like you and me who may or may not own Apple products, to buy its stock and vote on how Apple runs its company. If Apple hadn’t ever split its stock, one share of their stock would be worth $23,016 instead of the comparably low $411 that one share is worth today. Using our paper dollar example, imagine having to split $23k, four ways, or having to cash that out just to cover a minor $1,000 emergency. Stock is a great thing to buy, hold, and watch grow but what makes stock great is its liquidity, meaning that it’s very easy to transfer ownership or convert to cash by selling it.
Unlike gold or diamonds, which are most often exchanged in scheduled private meetings with a broker, stocks can be easily bought and sold every business day (Mon-Fri from 9:30 am to 4 pm), excluding holidays. Stocks can be traded for free online or through a broker who generally will charge a fee but generally speaking stock brokerage fees will always be substantially less than a gold or diamond broker who could charge up to 35% of the value of the transaction. Stock is so liquid (generally takes two days to cash out) that it’s often treated like money and can be handed down to children, given as a gift, donated to charity, or converted to cash. It is important to note that stock splits have made a lot more sense back in the day when retail investors could not buy partial shares of stock. Low-cost brokerages have become so competitive that they now allow investors to invest as little as one dollar into the company of their choosing. Since investors are no longer forced to buy a whole share of Apple, which would cost $400 before the stock split, there is essentially no difference between buying a partial share and a split share.
This post is for educational purposes only, it is not in any attempt a way to convince you to buy Apple stock. This post was created to explain what a stock split is and give a timely example using Apple as an example because they are a notable company that has recently announced plans to split their stock. This article is not intended to tell you if Apple is a good stock to buy or if Apple is a bad stock to buy, however, if you plan to buy Apple stock make sure to buy it before the August 10 ex-dividend date, so that you can receive a dividend payout on August 13. At Pocket Change Investments we believe that information can only be as credible as the source from which it originated. As a reader we challenge you to do your own research, check our receipts, and join the conversation.
- Apple Reports Third Quarter Results Exhibit 99.1 Apple’s 8-K filling 8-K Jul 30, 2020 Current report filing
- What Is a Stock Split? By JAMES CHEN investopedia.com/terms/s/stocksplit.asp