Apple Stock Split: What It Means for Interested Investors

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On Wednesday afternoon, Apple (NASDAQ:AAPL), the world’s largest publicly traded company, reported its second-quarter earnings. The company announced 7 percent income growth, as well as a dividend hike and a stock split. In response, the shares soared 8 percent on Thursday.

While the income growth and the dividend hike are clearly positive developments, what about the stock split?

Stock splits are intriguing insofar as they theoretically have no bearing on a company’s fundamentals, and yet they are still considered to be a big deal. A company that has 1 billion shares outstanding worth $100 each is worth the same amount as a company with 2 billion shares outstanding worth $50 each. The important thing is not a company’s share price but its overall market valuation relative to the fundamental value of the underlying business.

At the same time, when a company splits its stock, it often makes the news. Furthermore, we often see some interesting price action before and after a stock split. There is an intrinsic belief that a stock will be more appealing after a split. It is psychologically more satisfying to own more shares of a company, even if they are worth less. Also, small investors feel like they are locked out of high-priced stocks such as Priceline (NASDAQ:PCLN) or Apple – they don’t want to call their brokers and ask for three shares of a stock, because it makes them sound unimportant.

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