Apple (AAPL) created a tremendous amount of buzz for itself earlier this year when it announced that it was going to split its stock for shareholders in June. The financial media jumped all over this announcement and more investors began salivating at the thought of buying a piece of Apple for under $100 a share. We’ll explain how silly this excitement is, but first a little background on stock splits.
When a company conducts a stock split, it increases the number of stock shares outstanding and lowers the price accordingly. Here’s an example of how it works: let’s say a corporation has four million shares outstanding and each share is trading at $120. By multiplying the outstanding shares with the share price, you’ll get the market value or capitalization of the company, which in this case is $480 million. If a person held 100 shares in this hypothetical company, the value would be $12,000. If the company did a 2-for-1 stock split, the investor would now own 200 shares, but they would each be worth $60. So the stock split would be a wash.
Apple engineered a 7-for-1 stock split. This brought the share price for the Silicon Valley darling from nearly $650 a share down to roughly $92 a share. The stock split announcement did create excitement among mom-and-pop investors, who felt they could now afford to buy a piece of the electronics darling. When the split became a reality earlier this month, the stock price did jump. It reached as high as $95.05 in trading. A week later, however, the stock had lost all its gains. That, by the way, shouldn’t be surprising because the stock split should have no impact on the value of the company. Nothing has fundamentally changed. The value of the company remains the same, but more outstanding shares have been created.
Think of it this way. You are hungry and decide to have an apple. It doesn’t matter how many pieces you cut the apple into you will still only have one apple. You might trick yourself into thinking you got more, but you didn’t. In Apple’s case, the corporation just cut the apple into seven pieces.