An initial public offering enables a company to offer shares to private investors. A stock split is the division of shares owned by a company into several shares. This is put into practice to enhance the liquidity of stocks when they reach a specific accumulation edge. A common strategy is to split it at a ratio of 2 vs 1, 3 vs 1 or 4 vs 1, where the stockholder now owns 2,3 or 4 shares of each previous holding respectively.
In the past, many companies have practiced stock split events. Apple stock split in 2014, sending its share price from $645.57 to just $92.44. On July 30, 2020, Apple announced a 4-for-1 stock split for the fifth time. Already, the company saw a 10% increase in its share price following the decision.
Why do they want to do that?
It is a matter of visual perception. Technically, the company’s cumulative value of capital remains the same. Only those shares outstanding are further divided. Accordingly, the share price is reduced. Thus, it lowers prices without having a tangible effect on the company, thus attracting equity investors who want to own a part in the company at reasonable prices.
Moreover, it serves the company well to take this initiative. Psychologically, potential investors will be more inclined towards acquiring 10 shares of $100 than 1 share of the same amount. As they invest more and more, the total price goes up. Therefore, it is a win-win for both parties.
What happens to your investment??
A stock split does not add any cash value to your investment. The number of shares you will get now will only be magnified by a certain multiplier. In the case of Apple’s recent 4-for-1 stock split announcement for example, shareholders would find themselves 4 shares for each prior share, the same dollar value.
What about profits?
If the stock splits after the record date, the dividend is determined as usual. Apart from this, the amount of the dividend per share is reduced. However, the total cash value of the dividend is not subject to any change.
How do we see it?
Stock split may reasonably be seen as a successful marketing strategy pursued by companies to attract investors without any impact on the value of their capital. As stock rates drop, they find themselves more buyers boosting their demand. Many companies routinely perform stock splits in order to achieve this exact effect.
In general, it is a positive sign that the company sees the share price will increase further, which is why I suggest investing in Apple shares to make the right investment. If we had invested earlier in 2016, our investment would have increased 4.5 times. Imagine, and let the investment be true by investing in Apple.