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Apple Stock Splits and What They Actually Mean for Investors

With a market capitalization approaching $3 trillion, Apple is far and away the largest publicly traded company in the world. The iPhone maker‘s stock performance and trajectory carries major significance for global equity markets. For current and prospective Apple investors, understanding the implications of the company‘s stock splits over the years is essential. This comprehensive guide will examine Apple‘s history of splitting its stock, the concrete impact on shareholders, and what it means for your investment strategy.

What Exactly is a Stock Split?

Before analyzing Apple‘s specific stock split history and impact, let‘s review some stock split basics. A stock split is a corporate action in which a company divides its existing shares into multiple new shares, boosting the total number of shares outstanding. Common split ratios are 2-for-1 or 3-for-1, but any ratio is possible. The stock price is adjusted down proportionally based on the split ratio so that the company‘s total market capitalization remains the same.

For example, let‘s look at a hypothetical 2-for-1 stock split:

Before Split After 2-for-1 Split
Shares outstanding: 10 million Shares outstanding: 20 million
Price per share: $100 Price per share: $50
Total market cap: $1 billion Total market cap: $1 billion

While the total value doesn‘t change, the split does immediately double the number of shares outstanding while cutting the share price in half. More examples help illustrate the mechanics:

Split Scenario Share Price Before Share Price After
2-for-1 $100 $50
3-for-1 $150 $50
5-for-1 $500 $100
10-for-1 $1,000 $100

Conversely, a reverse stock split consolidates shares and increases the share price. For a 1-for-10 reverse split, an investor with 200 shares at $5 would hold 20 shares at $50 afterwards.

Why Do Companies Split Their Stock?

Companies decide to split their stock for several strategic reasons:

  • Lower Price Per Share – The main goal is to reduce the share price to a more affordable and appealing level for retail investors. At high prices, small investors can‘t trade as easily. Apple enacting a 4-for-1 split in 2020 lowered shares from around $400 down to approximately $100.

  • Increased Liquidity – More shares outstanding allows larger trading volumes and smoother buy/sell transactions. One study found stocks see a ~60% spike in liquidity in the year post-split. Higher liquidity also tightens bid-ask spreads.

  • Optimal Price Range – Companies aim to keep their share price within an ideal zone typically between $100 to $500 per share – high enough to appear valuable but low enough for accessibility.

  • Reinforce Confidence – Splits signal management‘s confidence in future growth prospects. This generates more investor enthusiasm and demand for the stock.

History of Apple Stock Splits

Apple has utilized stock splits on four key occasions over the past several decades to maintain an optimal share price under $100 and facilitate liquid trading:

  • June 1987 – 2-for-1 split enacted under CEO John Sculley with shares trading around $70 pre-split.

  • June 2000 – Steve Jobs executed a 2-for-1 split with shares hovering near $100 as the dot-com boom accelerated.

  • February 2005 – Another 2-for-1 split with shares around $65. Apple‘s iPod sales were fueling massive growth.

  • June 2014 – Tim Cook split the stock 7-for-1 with shares priced over $600. The split helped kickstart a 200% rally over the next 5 years.

[Timeline graphic of Apple stock splits]

Other tech giants like Alphabet, Amazon, and Tesla have all also split their high-flying stocks in recent years to maintain accessible price levels for investors.

How Stock Splits Directly Impact Your Investment

Stock splits have both short-term and long-term implications for shareholders. Here is how your investment and holdings can be directly impacted:

Short-Term Impact

In the immediate aftermath of a split, an investor will see the price per share decrease, while the number of shares they own increases at the same split ratio. Your total dollar value invested remains unchanged, just divided across more shares at a lower price.

For example, an investor with 100 shares at $500 pre-split would hold 500 shares at $100 after a 5-for-1 split. Their $50,000 position is unchanged, but now comprises 500 shares instead of 100.

Some investors see the lower nominal share price as an opportunity to accumulate more cheap shares. This influx of new buyers is part of the psychology that can potentially drive up the stock price in the short term following a split announcement.

One study found an average 7.93% abnormal gain in the first 25 trading days after a split. However, whether this pop endures long-term is up for debate.

Long-Term Impact

The aim over the longer term is for the split to dramatically expand the investor base by improving retail accessibility and liquidity. Wider ownership and ease of trading create conditions for sustained share appreciation.

According to behavioral finance research, the lower nominal share price also results in higher demand from both individual and institutional investors due to psychological and technical factors:

  • Individuals perceive lower prices as "cheaper" and more attractive entry points.

  • Institutional buyers prefer to take large positions in more reasonably priced shares. Stocks under $10 can be problematic for big funds to trade.

  • Lower price increases retail affordability and eases reinvestment of dividends.

  • Improved liquidity encourages larger block trades from major investors.

These demand shifts collectively act as a value unlock by broadening Apple‘s investor base after a split. Apple‘s post-2014 split trajectory shows this dynamic in action, with shares up over 330% since then.

Should You Buy Pre-Split or Post-Split?

When strategizing around stock splits, investors often ponder whether it is better to buy shares pre-split or wait to buy post-split. There are pros and cons to each approach:

Pre-Split Buying

  • Pros – Lets you hold more shares after split. Pre-split run-up can boost short term gains.

  • Cons – Downside risk of overpaying during pre-hype. Post-split dip could erase gains.

Post-Split Buying

  • Pros – Lower nominal price creates perception of discount. Post-split demand influx could drive gains.

  • Cons – Increased supply from split could spark profit-taking selling pressure.

Evaluating Apple‘s past splits shows mixed results when comparing the performance of buying pre-split versus post-split:

Apple Stock Split Pre-Split 6 Month Return Post-Split 6 Month Return
June 2014 +23% +12%
February 2005 +3% +18%
June 2000 -10% +60%

The data invalidates any definitive rule of thumb on timing split purchases. Ultimately, prudent investors should tune out short-term noise and make buy/sell decisions based on long-term valuation and business trajectory rather than split mechanics.

Do Stock Splits Actually Impact Share Value?

Conventional investment theory states stock splits are a cosmetic change that should have a neutral effect on share value, as the company fundamentals remain unchanged. However, ample empirical evidence suggests splits do impact value:

  • One comprehensive study analyzing over 1500 stock splits found an average cumulative abnormal return of 16% in the first year after splits, and 25% over 3 years.

  • Companies like Apple, Tesla, Nvidia, and Amazon have engineered huge multi-year rallies after splitting their elevated share prices.

  • Splits cause increased demand from index funds forced to buy more shares to maintain target weightings.

  • Improved liquidity, investor sentiment, and psychology around lower nominal share prices combine to drive value.

While not a direct catalyst or fundamental driver of growth in itself, ample data shows splits can unlock underlying share value by expanding a company‘s investor base.

Key Takeaways for Apple Investors

For current and prospective Apple investors, the key points to remember regarding the company‘s stock split history are:

  • Apple has conducted 4 stock splits in its history to maintain an accessible share price under $100.

  • Splits lower the nominal price per share while proportionally increasing number of shares owned.

  • Objective is to improve liquidity, retail accessibility, and expand investor ownership.

  • Split announcement often creates short-term trading pop from increased demand.

  • Longer-term, wider investor base facilitates sustained appreciation potential.

  • Timing purchases around splits involves tradeoffs – focus on outlook, not price optics.

  • Empirical evidence shows splits positively influence share value by broadening ownership.

While not directly creating fundamental value itself, Apple‘s stock splits represent a shareholder-friendly action aimed at enabling its equity value to be more effectively realized by attracting a wider investor base. For most individual investors, the lower nominal share price also makes building a position in Apple stock more achievable.