An explanation for why Apple split shares 7-for-1

“I’ve been rather scratching my head over the reason for the Apple stock split. As I noted before the reason why people like to have a stock price between $10 and $100 in the US markets is illogical. Or perhaps a-logical, in that there’s no particular reason to think that having a stock price in this range does anything very much at all,” Tim Worstall writes for Forbes. “We can see that there’s a golden zone for prices but to explain it having developed we need an explanation that will not only provide that origin of that golden zone but one that gives us a different zone for each country/market.”

Worstall writes, “It’s Matt Levine that provides that in a footnote over at Bloomberg: ‘I mean, it’s objectively ridiculous. That said, I’ve half-defended it as ‘a nostalgic Jesse Livermore throwback to when common stocks had a $100 par value and were supposed to trade roughly at par,’ and I sort of stand by that. You could build a whimsical historical market psychology in which (1) the right price of a stock is $100 and so (2) everyone wants his stocks to trade at $50-$80 so they feel cheap. I don’t know.” … [The] golden zone is different in each place. And, however il- or a-logical the existence of such a zone is we do know that it is there and thus the pattern of stock splits and consolidations that we see. Pure path dependence here, nothing more.”

“And finally Levine gives us a story that makes sense, at least a little bit. Which is the difficulty of trading in small lot sizes, or odd lot sizes,” Worstall writes. “The protection we all get as investors, those guarantees that our orders will be handled at best market price and so on, only apply if we’re dealing in standard lot sizes. Which means, in effect, 100 shares or more in any one transaction. And 100 shares in Apple at $500 each or more isn’t something that the average individual investor is going to do. Whereas 100 Apple at $80 is still a weighty purchase for an individual but one that’s going to have rather more people willing to consider it.”

Read more in the full article here.

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16 Comments

    1. Options can be a dangerous game to play unless you know what you’re doing. I still maintain that the 7:1 split was for one reason. Surpassing the previous peak means going over $100 now. There is a psychological bad taste in many investors mouths who invested at or around $700. If the stock came close to $700 again, there would be a psychological barrier to buying and a strong emotional pressure to sell.

      The psychological barriers at $100 won’t be the same thing.

  1. The daily volume of AAPL used to be over 20 million shares and the beta was 2 when the stock was less expensive. Now it’s at 8 million a day and volatility is down to 1. The 7 to 1 split will greatly increase liquidity and volatility bringing back the 10% of institutional investors who have left the stock. It is not for individual small players.

    1. Yes, the interesting thing is that each purchase, regardless of how many shares are involved, either raises or lowers the last sale price upon which most future bids are ultimately based.

  2. also, to the people who bought AAPL $575-700 from March to November 2012 and have been underwater for 2 years, the 7 to 1 split with dividends is a good way to reward patience and get LT stockholders to stay on board.

    1. Definitely not wrong. More like congratulations on a smart investment and hold. Probably enough for your retirement when that comes around.
      I myself invested the same amount at around $70 a share. Still a hefty chunk of my portfolio. Sadly before that I sold the same amount of shares at $30 just as the market realized the iPod phenomenon was the real deal. After that I gave up trying to predict the market and went all in on aapl. Overall return is currently 730% with the holdings increasing when every dividend reinvestment.

    2. My initial purchase was 1000 in 2003 at $14.98 ($7.49 split-adjusted). As Apple slowly climbed to $30 I kept buying. A couple years later I was able to put my 401k funds into Apple stock with a new self-directed 401k option my company instituted. Early on I did quite well with options too, but lately options is too expensive a game to play.

    3. No, but it is rather interesting that you feel the need to broadcast your purchase to a bunch of people you don’t know; as though we’re supposed to be impressed.

  3. The lot size argument is extremely out of date. It’s been decades since an individual investor was penalized for buying shares in quantities other than lots of 100.

    However, their other argument is closer to the truth. The fact is, most people, including Wall Street, are not that good at math. That’s the reason that EPS exists, so that companies with very different share prices can be compared on equal footing. But most people don’t understand EPS either. Most people just look at stock prices. And if you’re stock is above or below the typical range, it’s considered expensive or cheap, respectively.

    So, they are right, stock prices don’t do anything, but people react to share prices. They’ve been saying for a decade that AAPL simply can’t keep going up because the price is so “high” already. Now that it’ll be back down below $100, I suspect you’ll start seeing analysts setting high price targets again rather than just targets that are 10-20% above the current price.

  4. Another reason is options for new employees. Psychologically, Apple can now provide shares in the 1000s rather than hundreds for lower level new hires.

  5. There may be a psychological explanation – See Daniel Kahneman’s “Thinking, Fast and Slow. You should read the whole thing to really get it.
    I wonder how many of the “alogical” people have shares of Berkshire-Hathaway A currently at $190,000. Of course Berkshire Hathawya B only sells for approx. $127.

    1. Kahneman’s book—well worth reading for insight into why people believe as they do, and how they can be so tiresomely insistent on the superiority of their viewpoint over your worthless ideas.

  6. Stock splits are dilutive. Microsoft has too many shares outstanding such that the stock price hardly moves much. Makes no sense to buy back shares that raises stock price then split shares that adds more shares and lowers price. If Apple believed it had to split the shares, the split should have been something 5 for 4 or 7 for 3.

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