Do Stock Splits Have Any Affect?
Do stock splits affect the movement of a stock? Most investors believe that stock splits do affect the return a stock will have in the next few years.
It does make sense when you think about it, stocks only split after the price of their stock has been run up so high that it is harder for the average investor to invest into it. Splitting the stock is a perfect way to make it cheaper so that it is more affordable to everybody.
Nothing has changed, so eventually the stock should be pushed back to that high price by the same forces that pushed it there to began with, at least in theory. There may also be a psychological aspect to this. If a stock was trading at $200 and they had a 4 for 1 split the stock price would then be $50, even though nothing has fundamentally changed investors who are used to seeing it at $200 are going to consider it a bargain and start buying it.
If you take a look at the historical stock splits and their impact on the stock it does seem to have some truth to it. After all stocks that are spliting are usually outperforming the market to began with.
Even so that does not mean that it is the only thing you need to look at when buying stocks. There are plenty of other things to look at which can greatly increase your odds of success. For example if the company is fundamentally strong and offers a high dividend paying stock, so much the better. By looking at multiple factors you can increase your odds of success.
Another even more powerful strategy would be to combine stock splits with momentum investing. If a stock splits and then starts to fall there may be something else going on and it might not be such a great investment.
But if the stock splits and then starts to head up again it could be a signal that the stock is continuing its path of growth and will likely be a great investment as time goes by.
Leave a Comment
If you would like to make a comment, please fill out the form below.