Apple has dominated the financial news as of late, and not because they released their latest iPhone. Apple has become the first company with a market cap of $2 trillion and announced they would be splitting their company stock in a 4 to 1 split. What does this mean for markets, and how does it affect you as an investor? 

Market capitalization, commonly referred to as a market cap, is a measure of a company’s value determined by the market. It is a relatively simple equation: the stock price multiplied by the number of total shares. Market cap is not a reliable indicator of a company’s actual equity or enterprise value. Some would argue that Apple’s market cap is so much higher than its enterprise value, that it is an indicator of a potential steep reduction in stock price. 

The board of directors decided to split Apple’s stock in four ways. Meaning, if you owned ten shares of Apple, now you own forty. The total value of your investment remains the same. For example, if you take one piece of an apple pie and cut it in half, you still have the same amount of pie. If a stock split does not affect a company’s overall value, then why would Apple split its stock four times?

Behavioral investment studies have shown the lower stock price after a split can attract new investors. A lower stock price also makes owning Apple more affordable for investors, and with the emergence of companies like Robin Hood and Acorns, it could be a move to attract those investing in the market for the first time. Either way, a stock split should not be the sole reason you invest in a company’s stock.

If you have a sudden urge to buy Apple, we are here to make sure you understand what a stock split means. That way, you can decide whether you want to purchase shares of the company for the right reasons. Apple believes their stock will continue to rise in value, and the split creates an opportunity for investors that could not afford the price of their stock previously. Do you? If you have any questions after reading this article or would like to discuss your current investment strategy, please do not hesitate to contact your adviser.