Business

What you need to know about Apple’s 7-1 stock split today

Above: Even if you cut it into seven pieces, you'll still have the same amount of pie to eat.

Image Credit: lynn.gardner via photopin cc

Apple finally implemented its long-planned 7-for-1 stock split over the weekend, which means it began trading at a new price this morning: about $92.70, instead of the $645.54 it closed at on Friday.

Huge bargain! Rush out and buy as much AAPL as you can before the price goes up again! Right?

Wrong. In fact, a stock split makes no material difference to the value of a company or its underlying stock. Shareholders who used to have one share worth about $650 now have seven shares worth slightly more than $90, but the shares they own are worth exactly the same.

It’s like cutting a pie into seven pieces. You still have the same amount of pie — it’s just that it’s cut up into smaller chunks.

Stock charts, like Google’s and Yahoo’s, have already compensated to show the split-adjusted prices over time periods that precede the split. That means, while AAPL actually peaked at $705 in September, 2012, stock charts now show a split-adjusted price of $100 and change for that period.

So if a stock split is numerically and economically meaningless, why bother?

What a stock split does is provide a little bit of a psychological boost. For anyone who felt like Apple was overpriced at $700 (its high point), shares that cost $100 might seem a little more reasonable — even if nothing has changed about the underlying company’s value.

However, much as market mavens like to talk about the stock market’s efficiency and rationality, it often moves based on irrational investor preferences. So the split might account for the slight jump Apple’s stock made this morning.

Don’t expect that jump to last long, however. While two of Apple’s previous stock splits, in 1987 and 2005, were followed by rises in the stock’s value, one — in 2000 — was followed by a huge drop. But in all three cases, the changes in its stock price had more to do with market conditions and Apple’s performance as a company than they did with the stock splits.

There is one other little thing that might result from the stock split. As ABC reports, companies with higher stock prices affect the Dow Jones Industrial Average disproportionately — so Dow Jones is reluctant to add companies with high stock prices to its index of 30 key industrial stocks. (Hasn’t Dow Jones ever heard of market cap weighting? Good grief.) With a lower absolute share price, Apple might more easily qualify for inclusion in the Dow. That would be a nice feather in its cap.

But otherwise? This split is totally meaningless. Enjoy gawking at Apple’s new, lower number — and then move along.

More information:

Apple designs and markets consumer electronics, computer software, and personal computers. The company's best-known hardware products include the Macintosh line of computers, the iPod, the iPhone and the iPad. Apple software includes t... read more »

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