Skip to main content

ELI5: Why Split Stocks?

Last summer, Apple's stock price went from $500 to $125. On face value, this shocking. A drop of 75% for one of the world's most successful and beloved companies. Are iPhones the next BlackBerries? Was there a scandal with Siri? Nope. The reality is much more boring. 

It was a matter of corporate accounting. Apple did what many public companies do from time to time. They increased their number of shares - by splitting them. Stock splits can happen in many fashions. 2-for-1, 3-for-1, you get the picture. In Apple's case, 4-for-1. 

This means Apple 4x their shares outstanding. Their overall value remained unchanged. Just more shares, worth less a piece.

Seems like a lot of work to get back to same place, no?

There's a reason. Stock splits help increase access. As a stock rises, it becomes more and more difficult to buy. Berkshire Hathaway is a prime example. Through decades of compounded success (and never splitting) a single share is now trading well over a whopping $300K. 

You could make the case that greater access means more buyers, thus the price gets bid up. However, there are many examples of stocks dropping after a split. Including Apple, who's value was down following theirs. 

Whatever effect it might have shouldn't matter in the long run, the value eventually comes back to fundamentals. The impact on you, the investor is minimal. 


Popular posts from this blog

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event.  Be specific. Give clear examples. Vague feedback equals dismissed feedback.  Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes. 

ELI5: The Stock Market

Today we get back to basics and answer some of the most common questions about the stock market.

Step One is Knowing

In school, we listen to our teachers. At home, our parents. Throughout our childhood, following instructions is praised and rewarded. When we're young, there's value in this. We don't understand how the world works quite yet, so guidance can be lifesaving.  The bias to just accept obviously has drawbacks. Insert old jumping off a bridge adage .  This conditioning is especially strong for kids from lower income households. Their parents are more likely in working class jobs involving strict order-taking. Parents of middle-class households tend to be knowledge workers where influence is essential.  Studies have shown kids from middle-income households are more willing to negotiable with their teachers. They learn from their parents that things are not set in stone. This leads to better grades and learning outcomes when compared to their lower income counterparts who don't negotiable.  In business, if we simply accept things as they are, we would never innovate. In work, w