Dow Jones Set For Shake Up as Apple Announces Share Split
The Dow Jones Industrial Average (DJIA) is set for a major shake-up when tech giant Apple splits its shares 4-to-1, reducing the Dow’s exposure to the technology sector. Three new companies are set to enter the 30-stock index, replacing Pfizer, Raytheon Technologies and long-term component Exxon Mobil.
What is a Share Split?
A share or stock split is the action taken by a company that divides an existing share into multiple shares. This is called a forward stock split. This divides the share price between the number of shares. For example, if you hold a share that is valued at £100.00 and the company decides to act a share split on a 2-to-1 basis, you will now hold 2 shares at £50.00 each. Your total stock value has not changed, although you now have more shares than you had previously. In Apple’s case, the share split will be at a 4-to-1 ratio, therefore 1 x £100 share will now be 4 x £25.00 shares.
In some cases, a reverse stock split occurs when the company consolidates its shares. For example, taking 2 shares of £50.00 and combining them into 1 share of £100.00.
Why Does a Company Split Shares?
In cases of forward splits, and particularly publicly traded companies, a cheaper share price can be more attractive to investors who would otherwise not buy the higher share price. Also, having more, cheaper shares gives a greater liquidity for trading. (Similar to splitting a £50 bank note for 5 x £10 notes making it easier for smaller purchases.)
Reverse splits can occur to raise the price of a share to avoid being delisted from a particular exchange or even an investment portfolio.
Why Have Apple Decided to Split Shares?
Apple have made the decision to split shares to make them accessible to a broader base. This will be Apple’s fifth share split, the first being in 1987 at a 2-to-1 ratio, and the most recent in 2014 at a basis of 7-to-1.
How Does This Relate to the DJIA?
The Dow Jones is a “weighted” index, meaning that higher share prices hold more weight. The split moves Apple from the top-weighted company to the 17th. This meant that the weighting in the technology sector dropped by over 7%. In order to correct this, the DJIA will add software company, Salesforce; biopharma company Amgen; and tech and manufacturing company Honeywell International. Pfizer and Raytheon Technologies will be removed from the index along with Exxon Mobil who have been listed on the Dow since 1928.
The changes will take effect before trading opens on 31st August this year.
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