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.
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?
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.