Why would a company like Apple do a stock split?

Julie Brownlee, Fsp Invest, 26 Jun. 2014

Tags: stock split, what is a stock split, apple, retail investors, investing, why companies stock split, how a stock split works

A couple of weeks ago, Apple did a stock split. Each original Apple share became seven new Apple shares. So what is a stock split? And why do companies bother? Let’s take a closer look…

What is a stock split?

A stock split is simply when a company decides to split its shares into smaller proportions. A company will opt to do this usually because its share price has got on the high side.

But even in the US, stock splits are a rare occurrence these days. Many companies view a very high share price as a mark of prestige, David Zeiler in Money Morning US explains.

As well as Apple, some renowned companies have split their stock this year.

This includes MasterCard. It did a 10 for one split. This took its price from $818 a share to $81.25. Another one was Google. It did a two for one split. This took its staggering share price of $1,125 to about $570.

Why do companies stock split?

The fact is, a stock split makes no real difference. It doesn’t give any benefit to the company or its shareholders.

But there is a positive psychological impact. For retail investors, it makes many believe that the share is cheaper. Even though this isn’t the case.

Matt Krantz in USA Today says that investors “love this idea they’re getting more shares of a stock for nothing, even though the stock price is the exact same amount”. He believes there is more interest in a share once it announces a stock split and goes through with it.

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You can see why it can make retail investors more interested if a company has a high share price.

If you’re going to invest R10,000 in Naspers on the Johannesburg Stock Exchange for example, with its current price of around R1,200, you could only buy eight shares!

So there you have it, why a company like Apple did a stock split.

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