I’ve been rather scratching my head over the reason for the Apple stock split. As I noted before the reason why people like to have a stock price between $10 and $100 in the US markets is illogical. Or perhaps a-logical, in that there’s no particular reason to think that having a stock price in this range does anything very much at all. And yet we also know that people do like to have stock prices in this range, for we see consolidations to get them into that range when prices are consistently below $10 and we see splits to bring them down into this range when they are well above $100.
And I explained that this is illogical, or perhaps a-logical, by pointing out that the range in London is £1 to £10. So to provide an explanation we need one that covers both markets. We can see that there’s a golden zone for prices but to explain it having developed we need an explanation that will not only provide that origin of that golden zone but one that gives us a different zone for each country/market.
It’s Matt Levine that provides that in a footnote over at Bloomberg:
I mean, it’s objectively ridiculous. That said, I’ve half-defended it as “a nostalgic Jesse Livermore throwback to when common stocks had a $100 par value and were supposed to trade roughly at par,” and I sort of stand by that. You could build a whimsical historical market psychology in which (1) the right price of a stock is $100 and so (2) everyone wants his stocks to trade at $50-$80 so they feel cheap. I don’t know.
And it is true that traditionally London stocks were issued at a par of £1. So, it is just a historical hangover and that the standard par values were different historically tells us why that golden zone is different in each place. And, however il- or a-logical the existence of such a zone is we do know that it is there and thus the pattern of stock splits and consolidations that we see. Pure path dependence here, nothing more.
With that solved Levine then scotches the idea that Apple’s stock split is all about getting into the Dow. The reason being that getting into the Dow just isn’t all that important. There’s very little index investing that goes on in relation to the Dow, it’s all in the S&P 500 or 100, where Apple is of course already represented.
And finally Levine gives us a story that makes sense, at least a little bit. Which is the difficulty of trading in small lot sizes, or odd lot sizes. The protection we all get as investors, those guarantees that our orders will be handled at best market price and so on, only apply if we’re dealing in standard lot sizes. Which means, in effect, 100 shares or more in any one transaction. And 100 shares in Apple at $500 each or more isn’t something that the average individual investor is going to do. Whereas 100 Apple at $80 is still a weighty purchase for an individual but one that’s going to have rather more people willing to consider it.
I agree, it’s not the strongest of arguments but it’s the only one I’ve seen so far that really makes sense. Don’t get me wrong, I’m well aware of the general tendency to regard a stock price in the $10 to $100 range as being “right” and I can now see some historical reason as to why that might be so and also different from London. But the lot size argument is the only one that is rationally sensible to me, rather than being just something that lots of people believe.
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