An initial public offering allows a company to issue shares to private investors. A stock split is the division of shares owned by a company into multiple shares. It is put into action to increase the liquidity of stocks when they reach a specific threshold of accumulation. A common strategy is to split them in a ratio of 2 for 1, 3 for 1, or 4 for 1, in which the stockholder now owns 2,3, or 4 shares, respectively, for each previous holding.
In the past, many companies have practiced stock splits on occasion. Apple stock split in 2014, taking its share price from $645.57 to just $92.44. On July 30, 2020, Apple announced a stock split 4 for 1 for the fifth time. The company already saw its stock price rise by 10% following the decision.
Why do they want to do this?
It is a matter of optical perception. In technical terms, the cumulative capital value for the company remains the same. Only those outstanding stock splits are increased. Accordingly, the price per share has decreased. Thus it lowers the rates without tangible effect on the company thereby attracting stockholding investors who wish to have a share in the company at cheaper prices.
Besides, it serves the company well to take the initiative. Potential investors would be psychologically more inclined to receive 10 shares worth $100 than 1 share of the same amount. As they invest more and more, the net worth goes up. Thus it is a win-win for both the parties.
What happens to your investment??
Stock split does not add any monetary value to your investment. Now only the number of shares you have will be increased by a specific multiplier. For example in the case of Apple’s recently announced stock split on a 4 to 1 basis, stockholders would receive 4 shares for every previous share held at the same dollar value.
What about dividend?
If the stock splits after the record date, the dividend is determined as usual. Apart from this, the amount of dividend per share is reduced. However, there is no change in the total monetary value of the dividend.
How do we see it?
Stock splits can rightly be viewed as a successful marketing strategy adopted by companies to attract investors without any impact on their capital value. As the rates of shares go down, they find themselves with increasing number of buyers thus increasing their demand. Many companies regularly conduct stock splits in order to achieve the exact same effect.
Overall, this is a positive sign that the company looks to further grow the share price, and that is why I would suggest investing in Apple stock to make the right investment. If we had invested earlier in 2016, our investment would have grown 4.5 times. So imagine, and let’s make the right investment by investing in Apple.