Apple (NASDAQ:AAPL) recently announced that it will do a 4-for-1 stock split. The move marks the first time in six years that the tech giant has split its shares. It set off another round of optimism that sent Apple's stock price above the $500 per share mark.
For many investors, this will be the first time that they've dealt with a stock split. It's understandable that you might have questions about how it works. It's a relatively painless process when a company splits its shares, but it's still important to have a good sense of what's going to happen along the way.
When does the stock split really happen?
Apple investors need to understand three key dates associated with the split. One already happened on Monday, Aug. 24: the record date. As Apple itself described it, that's the date upon which the company "determine[d] which shareholders are entitled to receive additional shares due to the split."
That might make it sound as though a shareholder could sell their Apple shares after Aug. 24 and still be entitled to keep the extra shares from the split. As you'll see in more detail below, that's not the case.
The official split date is on Friday, Aug. 28. After the close of business, shareholders will actually receive the extra shares in their brokerage accounts. For each Apple share you owned prior to the split, you'll see a total of four shares after the stock split takes effect. However, you shouldn't necessarily expect the new shares to show up at 4:01 p.m. EDT on Friday. Brokerage companies will handle processing according to their own procedures.
Finally, the last date you need to know is Monday, Aug. 31. That's when trading in the shares on the stock market will reflect the post-split price. Because it's a 4-for-1 split, the new price should be roughly a quarter of the old price. That will make the total value of four new shares approximately equal to the value of one pre-split share.
Can I buy or sell shares between Aug. 24 and Aug. 28?
It's easy to get confused about what happens if you buy or sell shares between the record date and the split date. Fortunately, understanding how it works is much simpler than understanding why it works that way.
Put simply, if you place a trade anytime between now and close of business on Friday, Aug. 28, then you'll be trading the pre-split shares. If you buy the stock, you'll be the one to receive the extra split shares in your account. If you sell the stock, you won't receive the extra shares after the split. Whomever you sold those pre-split shares to will also get the additional shares.
If you want to trade post-split shares, you'll have to wait until Aug. 31. After that, all trades will reflect the split.
Will my dividend stay the same?
Apple hasn't yet declared a dividend for the period after the split. However, what usually happens is that the per-share dividend payment gets adjusted to reflect it. So for instance, Apple just paid an $0.82 per share quarterly dividend in early August. After the 4-for-1 split, it's likely that the company will declare next quarter's dividend in the amount of $0.205 per share -- one-fourth the size of the old dividend. That way, the total dividend payment received will be the same for those who kept the four post-split shares.
Is this going to be a tax hassle?
The stock split has no immediate tax consequences. Specifically, you won't be taxed on the new shares you receive after the split.
Going forward, though, you'll want to remember that your cost basis on a per-share basis will also get reduced by the 4-for-1 split ratio. So if you paid $400 per share for your Apple stock, your tax basis will be $100 per share after the split. If you then sell it for $125 per share, you'll have a $25 per share gain -- not bad based on the $400 you paid for pre-split shares.
Here comes the split
With all the hype about Apple's stock split, it'll be good to get the mechanics over with. Then, investors will be able to get back to paying more attention to Apple's fundamental growth prospects in evaluating what the next move is for the tech stock.