Enthusiasm for Apple Inc.’s (AAPL) 7-for-1 stock split likely a flash in the pan

The stock markets often display a manic-depressive pattern of responses to company announcements, especially when a huge and prominent company like Apple Inc. (NASDAQ:AAPL) is involved. When Apple underperformed slightly for Q1 2014, a disproportionate drop in share prices occurred immediately.

The positive reaction to Apple’s Q2 news is equally irrational, hailing the good sales of the Cupertino company as though they were some kind of unprecedented triumph. Besides revealing that emotionality and a theatrical, histrionic streak are just as powerful as scientific calculations in stock trading, it also shows that when the mood is right, traders and analysts will hail any development as a stroke of genius, when its real effect is likely to be muted. This seems likely to be the case with the enthusiasm garnered by Apple Inc.’s (AAPL) announced stock split.

Gold Festive BackgroundAs part of the series of statements accompanying its release of second quarter earnings data, Apple unveiled a plan to carry out a 7-for-1 stock split, set to occur on June 2nd, 2014. On this date, each shareholder will receive 6 additional shares for each share that they hold. Split adjustment of share prices will go into effect on June 9th, with each share worth 1/7th of the price it commanded at the close of trading on June 2nd.

This measure was hailed with enthusiasm, yet the actual effects are likely to prove muted – in fact, there are some factors that suggest the results will simply be “business as usual” after the split occurs. One of the most critical reasons is that more than 60% of Apple Inc. (AAPL) shares are held by institutions and not by individuals. The overall majority “vote” will lie with these institutional shareholders regardless of how the individual shares are subdivided. As such, institutional holders will determine general price changes in the stock, and introducing a greater number of individual shareholders controlling less than 40% of Apple’s 6 billion shares will not change that fact.

Furthermore, though stock splits usually increase volatility in prices, as multiple actors try to “game” the system, Apple’s stock is already quite volatile due to the strong reactions to relatively minor news noted above. Nor will increased trading of the shares by the minority, individual shareholders change the effect of the bloc of large shareholders who enjoy a secure majority. If the large holders follow a strategy of price stability, the small holders are too few to greatly disturb the equilibrium. If the large holders begin buying and selling wildly, causing abrupt price swings, the small holders lack the clout to reign this tendency in.

Apple Inc.’s (AAPL) stock split, in short, is a flashy bit of showmanship that may prompt brief spikes in share price when it goes through. However, most factors favor a status quo situation, and the stock split will probably ultimately do little to change the share price of the powerful Cupertino enterprise.