Understanding a stock split and what it means for investors

Apple recently split its stock for the fifth time in its history. So what does that mean, and how does it affect investors?

A stock split is exactly that, a division of the outstanding shares of a company.

Apple's recent split was a four-for-one, meaning that three additional shares were created for every currently existing share. If you previously owned 100 Apple shares, you'll now automatically own 400.

All things being equal, the market capitalisation of the company doesn't increase following a split. Rather, ownership is sub-divided into smaller parcels. So if you owned one share worth $200, a four for one split will mean you own four $50 shares.

Also, don't expect to see a big dip in the share price chart. It's automatically corrected as if the new number of shares always existed. So the shape of the graph stays the same, but the price will be modified appropriately.

Conversely, companies can undertake reverse stock splits. Just take the above explanation and flip it.

Apple's has a history of splitting. It did a two-for-one split in 1987, 2000 and 2005, and a 7-for-1 split in 2014.

Companies split their stock to boost liquidity.

"Multiple market makers are now providing extra liquidity, creating competition and reducing the spreads, which means investing in these international names is now more accessible than ever before," observes Chi-X Australia CEO Vic Jokovic.

But mostly it's smoke and mirrors. Splitting a stock makes it appear more affordable with greater upside.

Humans are quite fallible, with a natural tendency to believe that a $50 stock is more affordable than a $200 stock. Similarly, a stock can feel like they've more upside if it's growing from a lower price point.

Stock splits typically boost investor enthusiasm. But this isn't always the case, at least in the short term.

In fact, Apple's share price has dipped negative immediately following each of its previous splits, and the same happened this time.  By the same token, though, splits are often a symptom of a bullish market.

Tesla, on the other hand, closed the day 12.5% higher after its recent five-for-one split.

Buying or selling shares in response to a split goes against the tenets of long-term investing. But there are several options out there if you do want to get on board, including through a broker, a tech-heavy ETF such as ETF Securities' FANG ETF, Betashares Nasdaq 100 ETF,  or iShares Global 100 ETF, or via via Chi-X's Apple TraCRs.

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