Apple and Google Show that Stock Splits Are Cool Again

Now that Apple and Google split their stock, expect the thin pool of high-priced stocks to follow suit.

Can a stock’s price be “too high?” Good question. When Google split its stock in 2014, the share price had broken through the $1,000 ceiling. After a 2-for-1 stock split, Google’s price per share dropped and left only four stocks trading for more than $1,000 a share.

Most companies split their stock to lower the share price which will “hopefully” make their stock more attractive to investors. In reality, many investors prefer to buy 100 shares of a $20 stock rather than buy 20 shares of a $100 stock. These same investors believe a stock has more potential for a dollar increase if the share price is lower rather than higher.

This article also points out a basic reason why investors don’t profit from the actual stock split. If an investor, for example, owned 100 shares of Apple stock priced at $630 on the day before the recent 7-for-1 split, the investor would own 700 shares of stock after the split, but the price drops to $90 per share. A $63,000 investment before the split is still worth $63,000 after the split.

For more information go to

http://www.dailyfinance.com/2014/04/29/apple-google-stock-splits-cool-again/

Teaching Suggestions

You may want to use the information in this blog post and the original article to:

  • Discuss why companies split their stock.
  • Explain the effect of a stock split on a company’s market capitalization. (Market capitalization = a company’s share price x the number of shares outstanding.)

Discussion Questions

1. Why do corporations split their stock?

2. Once a company’s stock does split, the price may increase or decrease in value. After the 7-for-1 stock split, what happened to the share price of Apple stock?

3. Besides “possible” increase in value caused by a stock split, what other factors account for an increase or decrease in a company’s stock price?

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