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Apple stock split might attract the wrong investors

Apr 24 2014, 2:35am CDT | by , in News | Apple

Apple's stock split might attract the wrong investors
 
 

The company on Wednesday announced a stock split of seven to one which will not only bring in casual investors but also increase liquidity of stock

Apple's stock split is not going to leave you impressed by the company after all and this decision has been one which has been met with a lot scrutiny from outsiders as well as from Apple's own existing shareholders. There is an easy concept behind division of things; the more you divide, the smaller the pieces get. This is exactly what Apple needs to understand.

As of late, every share of Apple has been trading for $530 and with this one share, you get merely one-878 millionth of the company. On Wednesday, Apple made an announcement that it will split its stock seven-to-one and this has resulted in $75 which will get you 6.1 billionth of the company. A fact sheet was there to support Apple's stock split and the company has stated that there is a rationale behind this move which is fairly simple that the company wants more people to have a share in its stock. The company believes that there might be investors out there who would want to have a share in the company but at the same time they would prefer having smaller chunks than $530.

Apple's stock split leaves us to wonder why would someone who cant come up with $530 want to invest in a company such as Apple with individual smaller stocks? There is a possiblity that Apple hasnt though this through with more care because a study by Ravi Dhar, William N. Goetzmann and Ning Zhu (2005) found out that a stock split results in investors who are less sophisticated. Bigger institutional investors will simply not care whether the share is selling for $530 or $75 and this pretty much explains why Apple should be worrying at the moment. The investors who prefer playing around with stocks prefer lower share prices so they can easily jump in and out of it. As a result, more liquidity is created which means that the shares can easily be bought and sold for cash. But the most important thing is that Apple knows exactly what sort of investors it would be attracting with this stock split and it might not end up to be so impressive.

 

source: nytimes

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