Apple executed its 7-for-1 stock split on June 9, bringing down the stock price to around $92 per share. Stock splits usually entice investors, but they neither add nor destroy value because the overall equity remains the same. However, the psychology behind them can work wonders, creating more demand for the stock.
Why did Apple split its stock?
Companies usually go for stock splits for three reasons. One, liquidity for the stock rises when the number of shares available for purchase goes up. It results into lower cost of trading. Two, a lower stock price makes it more attractive and affordable to smaller investors. People who previously wanted to buy Apple (NASDAQ:AAPL) shares, but couldn’t purchase due to above $600 price can now own Apple shares for just around $92. The third reason is the Employee Stock Options Program (ESOP). With ESOP, companies pay their employees with its own stock. A lower stock price would give the Cupertino-based company more leeway to pay its people.
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It’s Apple’s first stock split in nine years. While announcing the split, the company said that it wants Apple shares to be more accessible to investors. Jason Mengel of Fusion Capital believes that the iPhone maker is positioning itself to become a part of the Down Jones Industrial Average Index, one of the world’s most popular equity indexes.
Inclusion into the Dow may push Apple stock up further
Dow Jones is a price-weighted index, so higher priced stocks have a greater impact on the index. A stock with $600+ price would not be considered for inclusion because it would have an outsized impact on the index. But Apple now fits well after splitting the stock. Stocks that get added to indexes like the S&P 500 or the Dow usually witness an increase in price because it increases the likelihood of big institutional investors buying the stock.
For instance, a mutual fund which tracks the Dow Jones index is required to “own every stock in the index.” So, if Apple makes it into the Dow, such a mutual fund will have to add the company’s stock to their fund. Therefore, a rise in institutional investor demand may push the value of stock further. Apple’s inclusion in the Dow would act as a psychological trigger for value investors to take notice of the stock. That’s because the Dow represents mature companies that are shareholder friendly.