Stock Split

Everybody gets so excited about a stock split, but I’m going to explain to you that maybe you shouldn’t get quite so excited. The big split this week was Apple stock. We’ve been waiting for this. It was a 7:1 split, which meant that if you had 100 shares before, you now have 700 shares. Sounds great, except the price adjusts. So, it really doesn’t make any difference. Before the split, the price was around $700 a share. After the split, the price is only about $100 a share. You have seven times more shares, but they’re only worth 1/7th as much, so the value ends up being the same.

I tell my students, this is like that $10 pizza you order. Well, you could slice that pizza into quarters or into eighths, but the value of the whole pizza doesn’t change. It’s still a $10 pizza. That’s the same way when a company splits its stock. It might be a 2:1 split or a 3:1 split. You could even have a reverse split, like a 1:3, meaning I had 3 shares before, and now I only have 1. They do that, because they want to get into the sweet spot on the price.

Remember, though, that regardless of the split, the value of the whole company doesn’t change. So, why do people get so excited about the split? Well, more investors can now afford to buy a round lot, which is 100 shares. And, demand in the short run will push up the price, so in the short run, you will have a bump up in the price. But, in the long run, remember, it’s still a $10 pizza, so splits are not really important to long-term investors.

What about taxes? Well, when it comes to splits, you don’t have to pay taxes when the split occurs. Your original cost will adjust to account for that. Other than that, it’s just more shares.

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