APPLE’s stock split impacts the DJIA, not the investor

We answer four commonly asked queries with regards to the company’s fifth stock split.
By Larissa Fernand |  28-08-20 | 
 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Apple is the most valuable U.S. company, followed by Microsoft and Amazon. Today is the company’s official stock split date. On Monday, August 31, trading in the shares on the stock market will reflect the post-split price.

How often has Apple split its stock?

This is the fifth time.

Apple previously split its stock on a 7-for-1 basis (June 2014), and a 2-for-1 basis (February 2005, June 2000, June 1987).

What does this mean for the company?

Other than a lower stock price, mostly nothing.

Splits don't change anything fundamentally about a company. Neither do they change its valuation.

Imagine splitting a pizza into two and sharing it with a friend. Each of you get a half slice. Now slice into four, each of you get two quarter slices. But the amount for you to consume remains the same. So does the taste.

What does this mean for investors?

Highly priced shares present no obstacle to institutional investors. A stock split is a gambit for making a stock affordable to retail investors, particularly when its price has ratcheted phenomenally over time.

Historically, stock splits helped entice investors left on the sidelines due to the high share price. But that is not relevant today as investors with relatively small amounts to invest are able to purchase fractional shares.

Brokerages such as Charles Schwab and Fidelity Investments give clients the option of buying a fraction of a share for as little as $5, opening up a range of pricey stocks to regular investors. They are not the only ones, here are some fractional share investing brokerages.

According to MarketWatch, stock splits have become far less common. Over the course of the nine calendar years from 2011 through 2019, there was a 75% reduction in the number of forward splits within the S&P 1500 index.

What does this mean for the stock market?

The Wall Street Journal had an interesting observation, published on July 31, 2020, that has been reproduced here.

In most cases, stock splits have no impact on the broader stock market, especially within the market-cap weighted S&P 500.

But the Dow Jones Industrial Average is a different story. The stock split won't shave any points from the blue-chip index, but it will make the tech company less influential in it.

The Dow is a price-weighted index, meaning higher-priced stocks contribute more points to the index's daily moves.

Right now, Apple shares trade higher than the other 29 stocks in the Dow, making its moves the most seismic. The stock split will move it to the middle of the pack, leaving UnitedHealth Group Inc. as the most influential.

The stock split may also widen the Dow's performance differential with the S&P 500 because the highflying tech sector's weighting in the blue-chip index will decline. The S&P is already outperforming the Dow this year by the widest margin in decades, with a gain of 0.5% in 2020 versus a decline of 7.8% for the Dow (as on July 31, 2020).

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