What is a stock split?
This corporate action converts existing shares into a larger number of new shares with a lower value per share. Often shares are split in a ratio of 1: 2 or 1: 3. This reduces the share price. The share is becoming more interesting for a broader group of investors because it looks cheaper. The company or stock market value remains unchanged. Public companies often do stock splits when the price of the stock has risen sharply. In the medium to long term, this can help the share price rise.
Each share split must be discussed at the general meeting and presented to the shareholders in an extra item on the agenda. In order to be able to carry out the share split, the approval in the form of a simple majority of the shareholders in the general meeting is sufficient.
If a share split is carried out, the previous shares will be withdrawn and replaced by shares with a lower nominal value (market value). Usually neither the WKN nor the ISIN changes.
The new shares are automatically booked into the shareholders' accounts in accordance with the split.
You have 100 shares in your portfolio before a share split and each share is valued at € 100. This corresponds to a total value of € 10,000. The split ratio is given as 1: 2. After the split, you have 200 shares at € 50 each in your portfolio. Nothing changes in the total value. The number of shares has doubled and the share price has halved.
At first glance, a stock split can look like a massive price slump for the inexperienced investor. A 1: 2 share split would cut the price in half suddenly. The historical prices are usually adjusted automatically so that investors do not act too hastily. A stock split is then not immediately recognizable in the chart. However, they can also be displayed in most chart displays.
Set stop-loss orders are usually automatically deleted in the case of stock splits, since otherwise there would be numerous involuntary sell orders! More details can be found in the general terms and conditions of the banks or brokers.
Current example: Apple
The price of the Apple share is listed at € 386.28 (as of 08/14/2020). According to the current state of knowledge, the share should be split in a ratio of 1: 4. As a result, based on a price of € 386.28 per share, it would soon be available for € 95.57 per share. The lower price of the share could be of interest to many investors.
Is Apple a buy recommendation?
The objective metrics of Apple stock look very good.
Positive key figures:
- Return on Equity: + 61.06%
- Equity ratio: + 26.73%
- Profit Margin: + 25,27%
- Course change in the last 6 months in cf. to the index: + 29,74%
- Course change in the last 12 months in cf. to the index: + 94.09%
- Expected earnings growth: + 18,28%
- Response to quarterly figures: +6.94
Negative key figures:
- Price / earnings ratio over 5 years: 36.28
- Current price / earnings ratio: 35.35
- Price to book ratio: 14.42
The only negative point is the small gap of just 0.% to the 52-week high. The share is at its all-time high since the share was launched.
TransparentShare therefore rates the Apple share as "Observe" as of August 14, 2020. The rating of TransparentShare is based, among other things, on the fact that a share must trade at least 10% below its 52-week high. However, anyone who believes the share price will rise could of course still venture into the market.
Show the valuation of Apple shares
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Your TransparentShare team
Photo of Medhat Dawoud on Unsplash