What is a stock split?

 

You probably know that Google had a stock split a while ago, and now, Apple is headed for the same on June 9. But what is a stock split and is it good or bad for the stockholders? Let`s take a closer look at a stock split and what it is.

 

A stock split is a corporate action in which a company divides its existing shares into multiple shares. The number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split did not add any real value.

The most common split ratio is 2-for-1. This is called «forward stock split», which means that the stockholder will have two shares for every share held earlier. Apple have a 7-for-1 split, but there are number of «groups» impacted by the split.

 

Let`s take an example: Company A has 10 million shares outstanding and the stock price is $100. The Company A`s market cap is $1 billion. But the board of directors want to split the stock 2-for-1. The new number of stocks will double to 20 million, but the market cap is still $1 billion, as the stock price drops down to $50. Market cap is unchanged.

 

So, what is the point of doing that? They might have other things to do. Well, first of all, a split is usually undertaken when the stock price is quite high, making it pricey for investors to acquire a standard board lot of 100 shares.

 

If Company A`s price per share was $100 each, you would need to pay $10,000 to own 100 shares. If the share price was only half of that ($50), then you need to pay $5,000 for 100 shares. Second, the more shares a company have, the greater the liquidity for the stock, which facilitates trading and may narrow the bid-ask spread.

 

As you can see, the market cap is unchanged, but a split can often results in renewed investor interest, and that can have a positive impact on the stock price. Stock splits in blue chips companies like for example Apple and Google are a great way for the average investor to accumulate an increasing number of shares.

 

Many of the best companies routinely exceed the price level at which they had previously split their stock, causing them to undergo a stock split yet again. I have been following Amazon.com since its start in late 90`s.

 

I see three splits in the Amazon.com stock split history database. The first split for Amazon took place on June 02, 1998. This was a classical 2-for-1 split. It means for each share of Amazon owned presplit, you now owned 2 shares. For example; a 1000 share position pre-split, became a 2000 position following the split.

 

The second Amazon split took place on January 05, 1999. This was a 3-for-1 split. For each share of Amazon owned pre-split, you now owned 3 shares. For example; a 2000 share position pre-split, became a 6000 position following the split.

 

The third split took place on September 02, 1999. This was a classical 2-for-1 split, meaning for each share of Amazon owned pre-split, you now owned 2 shares. For example; a 6000 share position pre-split, became a 12000 position following the split. I remember all the splits very good.

 

It was exiting and it was in the beginning of a new era in the tech stock history. Keep in mind that when they split the stocks, the market cap is the same, but the number of stocks is changed, which means you own more shares, but the shares are valued at a lower price per share. Very often, we that a lower price for a stock can attract a wider range of buyers. And here is the interesting thing; when the stock price goes down, the demand for the stock is increasing. This means of course that the market cap will rise which is good for the company.

 

As always in the stock market; you can`t only look at only one metrics. You have to look at the underlying fundamentals of the business. Looking at the history of Amazon, an original position size of 1000 shares would have turned into 12000 shares today.

 

Google made its split because they want more control over the company and shares. You have different share classes in Google, and all of them have different prices. You can see Google, Google A and Google C when you search for the stock.

 

Many investors are wondering if Apple`s split will mark a peak in its shares as both Google and MasterCard declined after its two share classes split. You can`t compare Apple`s split to Google`s split, because of its different share classes, as one of which had no voting rights, so each class really became its own separate trading vehicle.

 

Right after the split in Google, the shares declined, but that was because of a poor earnings report and not because of the A class shares in Google. I just wonder if Apple will move into the Dow after this split?

 

Apple has three splits in the Apple stock split history. The first one took place on June 16, 1987. This was a 2-for-1 split. The second split took place on June 21, 2000. Also a 2-for-1 split, and the second split took place in February 28, 2005, with a 2-for-1 split. Apple`s 7-for-1 split is approaching and will take place on June 9, 2014.

 

Other key dates:

 

The record date: June 2, 2014 – determines which shareholders are entitled to receive additional shares due to the split.

 

The split date: June 6, 2014 – shareholders are due split shares after the close of business on this date.

 

The Ex date: June 9, 2014 – the date determined by Nasdaq when Apple common shares will trade at the new split-adjusted price.

 

This split means that six additional shares of stock are issued for each share in existence on the Record date, June 2, 2014. The number of shares outstanding will be multiplied by seven and earnings per share will be divided by seven.

 

Reports today:

 

08:30 a.m EST Core Durable Goods Orders m/m

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09:00 a.m EST S&P/CS Composite-20 HPI y/y

09:00 a.m EST HPI m/m

09:30 a.m EST ECB President Draghi Speaks

10:00 a.m EST CB Consumer Confidence

 

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