A company can release shares to private investors through an initial public offering. A stock split refers to the division of company-owned shares into multiple claims. When shares reach a certain level of accumulation, this is done to increase liquidity. Splitting them in a 3-for-1, 2-for-1, or 4-for-1 ratio is a common strategy. The stockholder will now have 2,3 or 4, depending on the previous holding.
Many companies in the past have practiced stock splits. Apple stock split in 2014. This reduced its share price to $645.57 from $92.44. Apple announced on July 30, 2020, that it would be slicing its stock 4 to 1. The company already saw a 10% increase in its stock price after the announcement.
Why do they want it?
It’s a matter of optical perception. Technically, the company’s cumulative capital value remains the same. Only the fraction of outstanding shares is increased. The price per share decreases accordingly. It lowers rates without having a material impact on the company, attracting stockholder investors who want to own a share of the company at reasonable prices.
It is also a good idea for the company to take this initiative. Potential investors would be more inclined to purchase 10 shares worth $100 rather than 1 share of the same value. The total price rises as they invest more. It’s a win for both sides.
What happens to your investment?
Your investments won’t be affected by the stock split. The stock split will only increase the number of shares that you have now by a certain multiple. For example, in the case of Apple’s stock split on a 4-for-1 basis, stockholders will receive 4 shares for every share they have previously, at the same dollar amount.
What about dividends?
The dividend will be paid as normal if the stock is divided after the recording date. The dividend per share is also reduced. However, the total monetary value is not affected.
What is the best way to see it?
Stock splitting can be considered a profitable marketing strategy by companies to attract investors, without having any effect on their capital values. They find that there are more buyers as the share rates drop, which boosts their demand. Stock splitting is a common practice in many companies.
It is positive that the company expects the share price will rise further. This is why I recommend Apple Stock as an investment. Our investment would have multiplied by 4.5 times if we had made it earlier in 2016. Imagine that. Let’s invest in Apple.