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

Apple performs its first stock split in nearly a decade. Here's how it affects long-term investors, for better or for worse.

Jun 10, 2014 at 8:00AM


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.

How long before Apple gets there?

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Evan Niu, CFA, owns shares of and has options on Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers