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Apple Stock Split 7-1 and what you should know about stock splits

Starting this week, Apple’s stock has been split 7-1, which means for each stock you own before this week, now you own 7 of them with price adjustment for the split.  

Many people think that with stock split, the stock is suddenly cheaper and therefore you should buy since you are getting a "deal".  Let’s examine the picture below.

photo-3.JPG

Here's the catch, if you bought the stock after the split, instead of one apple share, you getting one seventh of a share.  As you can see, you not getting a deal, you are essentially paying the same price for the stock.  Since the  stock was last traded around $645, after the split, the stock sell for 645/9 = $92 per share.

There are few companies that have let their stock prices  go up into triple and more digits.  Example, Berkshire Hathaway (BRK), Google (GOOG), Priceline (PCLN), Amazon (AMZN), What’s the pros and cons  of not splitting a stock even if it had reached “high” prices? Let’s do a little analysis

Advantage:  more stable trading volume,  thus theoretically less speculation.  Warren Buffet has famously decided not to split BRK for a long time, and the stock is now well over six digits.   His rationale was to attract high quality shareholders that will buy and hold his stock and stays relatively close to its intrinsic value.  Even though BRK now have two types of shares: A and B.  B share was created so mainly to allow A shareholders to convert to B share in the case of gifting shares to family members without incurring gift tax limit ($10,000 as of year 2014).  The B share also only has about 1/7 of the voting right even after price adjustment.  

Disadvantage:  seemingly more expensive, most beginner investors look at the price only without considering other factors such as Price/Earning (PE), Market Capitalization, so the higher stock price might create less demand among some investors.  

There are also stock that have went through number of splits.  For example, Microsoft (MSFT).  If it hadn’t split nine times since it IPO back in March 1986, its stock would be around $10,000 a share (using current price of $41 as basis of calculation).

There are few companies that have let their stock prices  go up in to triple and more digits. Example, Berkshire Hathaway (BRK), Google (GOOG), Priceline (PCLN), Amazon (AMZN).  Google recently just had 2-1 split of its stock, but still relatively high (currently in $500+  range).  

At the end of the day, the splitting  of a stock really offers no value to the underlying business of the company.  However psychologically, to inexperienced investors, it might look like a deal to be had.  I’m here to tell you that you should not base your buying decision on the stock split, at least not solely.

 

 

 

 

 As an intelligent investor

  you have to look at the fundamental value such as the price to book value (P/B), Price Earning (P/E), Profit Margin, Growth rate compare to the industry.  


Please don’t hesitate to comment below or email the team at TeenAnalyst@gmail.com

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