Companies issue a stock split for many reasons. A stock split is a strategy used by a company to increase its total amount of shares available. For example, imagine the total amount of shares of a company is one whole pizza. The pizza represents every available share from a company. If a company issues a 2-1 stock split, the pizza will be in two slices. Likewise, if a company issued a 4-1 stock split, the pizza will be in four slices of pizza. In each case, the pizza keeps its original value, one whole pizza. Except the pizza will be in different quantities.
There are various reasons for a company to issue a stock split. A few common reasons include psychology, liquidity, and volume. In 2014 Tim Cook, Apple's CEO, stated, "We're taking this action to make Apple stock more accessible to a larger number of investors.". To add context,Apple performed a 7-for-1 split as its share price reached $700. At its core, the strategy was to decrease the cost of the stock to make it more accessible to a larger number of investors. As you can imagine, $700 is a steep price tag. Not many people may be able to afford to purchase a stock at such a high price. Although many brokerage firms offer fractional share purchases, investors may shy away from shares with high price tags. Apple's 7-for-1 split dramatically reduced the price to $100, making it more accessible to a bigger audience. The more accessibility, the more the stock is purchased, providing the company higher trading volume.
In most cases, a stock split has no impact on the broader stock market. During a stock split, the immediate difference an investor will face is the number of shares. The number of shares does not impact the value of the company, it remains constant. Likewise, it will not alter the value of your portfolio.
In Warren Buffet's 1983 Berkshire Hathaway shareholder letter, Buffet said, "Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?" There are a few ways to interpret this: there is no inherent value a company or an investor gains from a split, or the benefit received by a company or an investor is minuscule. In any case, an investor should evaluate stock through a bottom-up fundamental analysis approach rather than a sole focus on the stock split.
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