The Meaning of Stock Splits

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Last week Apple announced that it would undertake a 7-for-1 stock split in June. Such a split will result in every Apple shareholder will getting six additional shares for each one that they hold when the split takes place, and as a result the price of Apple’s shares will start trading at one seventh of their price before the split. In other words, since shareholders will have 7 times as many shares at one seventh of the price, the value of their holdings won’t change.

So why would a company like Apple want to do a split if it doesn’t affect the stock’s value? Matt Yglesias at Vox wrote a good explainer detailing the reasons. Companies generally split their stock to reduce the price so that it’s slightly easier for people to buy and sell in round numbers of shares. Apple had the additional motivation that its split increases the chances that it will be included in the Dow Jones Industrial Average. There can also be aesthetic benefits to having a stock price that’s not perceived as “too high” or “too low”: in 2011 Citigroup pulled off a 1-for-10 reverse stock split to increase the price of the its stock after its plunge during the financial crisis.

The overall effects of these changes, however, are minuscule compared with other factors that affect stock prices, such as companies’ profitability, financial condition, and growth prospects. Stock splits change a few numbers around, but they don’t affect shareholders in any meaningful way.

Topics: Blog Citigroup Stock Split Dow Jones Apple