Don`t panic if you think that the price of Apple Inc is down -85%, because it isn`t. It`s just your brokers fault. They have not changed the amount of shares as they were not prepared for the coming share split as we all saw in Apple Inc.
This is happening many times and I have seen that in stocks I have owned many times. So, what is going on here? Apple stock is cheaper because its 7 for 1 split went into effect. The Apple`s share price is back to a 2006 level, trading above $100.
In a traditional 2 for 1 split, all owners of common stock have their share counts doubled while the price is simply cut in half. Shares are now worth half as much as they were before, but there are twice as many available and the percent ownership of each shareholder is unchanged.
Most of the data surrounding stock splits seems quite bullish. In a study by Dr. David Ikenburry of Rice University, he found that stocks which split 2-1 on average outperformed the control group he created by 8% after a year and by up to 12% after three years. The study looked at stocks between 1975 and 1990.
Dr. David Ikenburry did another research including data from 3-1 and 4-1 splits and found that the results from 1990 to 1997 were practically identical to the findings from the original study. A study from 2003 from the Chinese and City Universities of Hong Kong and the Hong Kong Polytechinic University corroborates Ikenburry`findings with similar evidence from the stock market in Hong Kong.
The reason why stocks is performing better after a stock split is probably because they become more affordable to smaller individual investors. They simply look cheaper. People are probably not willing to sink $600 into a single share of Apple, but they may be amenable to spend $400 on 4 shares after the 7-1 split. It`s more a psychological thing.
The Wharton School of Business found that institutions have increased their percent ownership in stocks from 34% in 1980 to 67% in 2010, and its widely believed that institutions like mutual funds are less perceptible to psychological biases like a lower sticker price than non-professionals.
Ikenburry belive that the stocks perform well when they split because the split itself is a signal of bullish sentiment from management. Apple hasn`t had a new product catalyst to ignite its fundamentals since the iPad was released in 2010.
This year CEO Tim Cook has promised several new types of products and that may be the reason Apple`s management has the confidence to split the stock. What could be worse for a CEO than taking a high value stock, splitting it into pieces, then see the face value fall even further sending investors into a panic?
Apple`s acquisition of Beats Electronics can make the stock go higher, but I don`t understand that Apple was so interested in their headphones. They could make their own at a cheaper price. Dr. Dre must, for all i know, have another plan with a new product we don`t know yet.
The music streaming business can be a good business, but so far it isn`t. They may be changing the strategy to make the $3 billion acquisition of Beats a boost and give Apple new income. Anyway; the acquisition of Beats Electronics is a sign of things to come. They have competitors. Google`s Youtube is the world`s largest music streaming service, and Youtube disclosed that 40% of its total users are coming from mobile devices.
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