Apple Stock: What This 7-for-1 Split Means for the Future of Apple

Apple's (NASDAQ: AAPL  ) 7-for-1 stock split took effect yesterday, and investors celebrated by sending shares up nearly 2%. Some of the consequences are purely psychological, while others relate only to market mechanics and have absolutely no impact on long-term fundamental performance.

With shares now trading at a fraction of where they closed last week, here is how the split may affect Apple investors going forward.

A mind game
Even though stock splits offer no mathematical benefits in terms of greater ownership, investors sure do love them. The perceived affordability tends to bring more investors into the fold, even though it's purely a psychological effect.

Old-fashioned investors who still prefer to buy stock in round lots can now "afford" 100 shares, which just has a nicer ring to it than buying 14 or 15 of the pre-split shares for the same amount of money. It's hard to quantify how many investors still highly prefer trading in round lots, but rest assured they're out there.

Indeed, Tim Cook acknowledged that making Apple stock "more accessible to a larger number of investors" was one reason behind the split.

Because of the positive psychological implications, stock splits can add to price momentum in the short term. Of course, we Fools don't generally place much emphasis on short-term events, as we prefer long-term fundamentals, but in this case Apple has both going for it. As Apple continues to recover from its 18-month slump, the split is adding to its upward trajectory.

Index effects
You've probably heard the argument by now that Apple can finally be considered as a Dow Jones Industrial Average (DJINDICES: ^DJI  )  component. The price-weighted index could potentially add the Mac maker, and as the most valuable technology company in the world, Apple is the quintessential blue chip. Still, because of the price weighting, it would have less of an impact on the Dow's daily swings than a dozen other components, all of which have smaller market caps.

If Apple does end up getting some Dow love, index funds would be obligated to pile in. That may cause buying pressure in the short term, but it also translates into greater volatility in the future (as if Apple shares weren't volatile enough).

Exchange-traded funds have taken off in popularity over the past decade, and additional index ETFs that would potentially involve Apple can create volatility. The most popular Dow-tracking ETF is SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA  ) , which currently has $11 billion in net assets. ETFs are subject to a constant creation/redemption process for shares, where arbitrageurs (authorized participants) help keep the market price close to the net asset value. This process requires a lot of trading in the stocks contained in the underlying portfolio, and this trading adds volatility.

There is no evidence that suggests these index effects result in greater long-term returns. Rather, it's just a bumpier ride.

A lower all-time high
Shares had peaked at $705.07 (pre-split) on the day the iPhone 5 was launched in 2012. That all-time high similarly gets adjusted downward to $100.72 (post-split). Thanks to greater price continuity related to the lower share price, it's a little bit easier for Apple to tap a fresh all-time high. Apple was always heavily traded with plenty of liquidity, so price continuity was never really a problem for the Mac maker.

Still, a penny change in price now means a tiny bit more than it did before, even as the market usually accommodates for high-priced stocks in the form of larger spreads and slightly less price continuity. Psychology comes into play again here, as $100.72 seems more within reach than $705.07.

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Read/Post Comments (12) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On June 10, 2014, at 8:15 AM, larryw101 wrote:

    This article says nothing meaningful. It's things we all already know from other stock splits.

    It's just another worthless article being thrown out by the fools at Motley. And fools they are !

    Motley Fool is longer of any benefit to investors. It's filled with articles from know-nothing kids who try and pump out as many articles as they can for the sake of their pennies-a-click commission.

    It's strictly a case of quantity and not quality journalism.

  • Report this Comment On June 10, 2014, at 9:54 AM, fishhouse523 wrote:

    Disappointingly, I have to say I agree with larryw101's comment. Unless things change, I will not renew my subscription. Why isn't there a higher quality control standard for the writing? Isn't there an editor?

  • Report this Comment On June 10, 2014, at 10:43 AM, teetim44 wrote:

    I just cancelled my subscription after 10 years because of the verbose non-value added commentary. I found myself spending too much time reading pointless articles like above. TMF does had some good stock picks, but my time is too valuable to put up with one verbose article after another. Thnx Fools

  • Report this Comment On June 10, 2014, at 10:59 AM, J9sings wrote:

    As a new investor who is new to the game and wants to learn about and understand these types of things, thank you for the article.

  • Report this Comment On June 10, 2014, at 12:28 PM, The1MAGE wrote:

    If the stats from years ago still hold, stocks that split outperform the market. I never did find out of it was psychological, or (more likely) related to the reason the company believed in splitting the stock.

    BTW why doesn't our scorecard automatically adjust for these splits?

  • Report this Comment On June 10, 2014, at 2:37 PM, eldoncarson wrote:

    Can someone tell this new/novice investor what impact the split has on dividends? The last quarterly dividend was 3.29, if they stay consistent, will that be divided by 7 as well (around .47/sh)? Or does the annual projected dividend/sh stay the same?

  • Report this Comment On June 10, 2014, at 5:05 PM, Mathman6577 wrote:

    @eldoncarson: The dividend is divided by 7 too. The quarterly is now 47 cents a share.

  • Report this Comment On June 10, 2014, at 10:02 PM, freyguy17 wrote:

    TIred of reading lame comments from kids who haven't even been around long enough to understand "INVESTING", let alone trading.

  • Report this Comment On June 10, 2014, at 10:07 PM, malclave wrote:

    "even though it's purely a psychological effect."

    Is it purely psychological for a smaller or beginning investor?

    If I have $1000 to invest and AAPL is at $600, do I buy 1 share of AAPL and leave $400 in cash? 1 share of AAPL and $400 in other stocks (paying a second brokerage fee)? Or buy $1000 of another stock?

    If I have $1000 and AAPL is at $86, I can buy 11 shares with just a little left over in cash.

  • Report this Comment On June 10, 2014, at 11:00 PM, freyguy17 wrote:

    You NEVER put all of your money in just one stock. So, buy one share @ 600 if you MUST own AAPL, then rationally apportion the remainder. The split makes NO difference if you're a wise investor wanting to diversify. You simply don't buy what you cannot afford (i.e. @ 600 bucks per share).

  • Report this Comment On June 11, 2014, at 1:12 AM, malclave wrote:

    The $1000 is what I would have to invest at that point in time; when I first started investing (outside my 403b plan), I would put money into my account every 3 months and buy a single stock (usually) to minimize brokerage fees. It wouldn't have been a matter of that I HAD to own Apple... I wouldn't buy it if it meant either letting $400 stay in cash for a few months or paying a second brokerage fee. At $86, I would have felt like I at least had the option of buying it based on how I was trying to get into the investment game.

    I certainly agree that a split is *mostly* psychological, I'm just not convinced that it is *purely* psychological.

  • Report this Comment On June 11, 2014, at 9:16 AM, kenneth360 wrote:

    Regardless of the split, if someone where to take advantage of the split and the reasonable stock price 5-10 years down the line does anyone think it will be back up, roughly $700 per share

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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