How Effective is Stock Split on the Stock Market? Citing Apple’s Recent Stock Split

In Apple’s just-reported-quarter results, the tech giant announced a 4-for-1 stock split in its earnings call. Shareholders would get 4 shares for the price of one. While some people may assume that this move could launch the US stock market into extreme bull territory, it may not necessarily be so in reality.

Usually, a stock split is a strong indicator for a bullish market, in that, a company is very confident that its stock will increase in value in the next few months or years to come. Companies that adopt this technique run it from the aspect of “sweet spot” where they have a target for their stocks to trade. If the companies’ stock trade above the sweet spot, they will split their stock in hope that the price will not fall back into that range.

A stock split’s ability to have a bullish effect on the market is backed by academic research. One of the earliest and most recognized research by David Ikenberry, a finance professor at the University of Colorado, showed that stock split had the ability to beat the market. In his findings, it was seen that the average stock, when put on a 2-for-1 stock split beats the market by 7.9% over the year after the split is announced, and eventually 12.2% over three years from when the split was announced.

In the case of Apple’s 4-for-1 stock split the case may not be so as the effect of stock split on the market has grown weaker over the years. The first reason for this is that highly-priced shares don’t pose a threat to institutional investors. The second reason is that retail investors with smaller amounts can now easily purchase fractional shares.

In a recent column entry, Allan Sloan, a columnist with the Washington Post shared from a personal perspective why he thinks the Apple 4-for-1 stock split will make no difference in the stock market. He said the “upcoming split will make no difference to its influence on the S&P—but it will greatly diminish its influence on the Dow while simultaneously increasing the influence of the Dow’s 29 other stocks.” Apple is one of the 30 stocks that are listed on both the Dow and the S&P 500.

“It’s similar in nature to cashing in three-quarters of your Apple profits, relocating them to the other 29 issues and keeping a quarter of the Apple shares you have,” said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

While the bullish effects of stock splits on the stock market may have weakened over time, it doesn’t imply that stock splits no longer have any significant bullish effect on the market.

In a 1996 newsletter created by editor Neil MacNeale and entitled 2-for-1 Stock Split Newsletter, MacNeale created a stock split strategy that perfectly worked for him until it was eventually officially adopted. Each month, the editor purchased a stock for a model portfolio after a recent split, and hold it over 30 months, until it gains value. The portfolio became so successful that an ETF was formed based on it, the Stock Split Index Fund until it closed in 2017 due to lack of interest. Although the ETF closed, the NYSE continues to calculate stock split index.