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5 Ways to Profit from a Stock Split

By Edited Oct 27, 2013 0 0

The basics of the stock market are so simple that everyone has heard it. Buy low and sell high. Succeeding at this is another thing all together. Looking at the past it is easy to say when a person should have entered into a trade or when they should have sold. However we don't have the luxury of trading in the past and are limited to trading in the present. To be successful, an investor or trader must get as many biases and factors in their favor as they try to predict the future. A company's stock split is one of the most predictable chain of events that the investor has to use.

A stock split is when a publically traded company decides to increase the number of shares traded and then to lower the price by the same multiple. A 2:1 (two for one) split means that an investor will own 2 new shares for every 1 old share they have. Each new share will be half the value. The overall value of the investment stays the same. Why would a company want to do this? For one, companies will sometimes like to have their stock in a certain range. As they become profitable and the price goes up it can get too high. With splitting the price of the stock it drops the price. This can bring increased activity as the new price will fall into a range where more investors and traders can participate.

A stock split is an exciting and positive time. It's a sign of strength that the company is looking to expand its market share in the number of and value of its shares of stock in the market. Most investors agree that it's a positive sign of growth and will invest into a company that splits its stock. It's this positive bias that the future of a company that splits its stock will continue to grow that we can take advantage of with 5 predictable phases of a stock split.

Before the Public Announcement of the Stock Split
The first and most profitable long term stock play in a stock split is before the company makes a public announcement that they will split the stock. Just how can an investor predict a split before everyone else?
Has the stock split before? We can look to its past splits. What was the stock price that it split at? If the company did not want it high before then it reaching the same height is a good indicator.
Is there a special meeting of the board of directors? They are the ones to decide on a split and if they have a special non regular meeting coming up it would be for a special reason.
Playing a stock split before the announcement has the potential for the most profit as you get in first before the crowd but it's also the most risky of the 5 plays because there is no real guarantee and at this stage we are just guessing.
This play will last the longest as you have the entire stock split process to stay in.

The Company Makes the Official Public Announcement
Immediately after the company announces that they will have a stock split the crowd will start to pour in. If you are already guessing there will be a stock split you be ready while most others are still reading the press release. This is a very quick play as the price will go up with the renewed interest but then drop quickly too. Why does it drop? There will always be people wanting to take profit that have no interest in a stock split. All they see is that the stock went up. Or other people that heard about the split got in just for quick short term gains. Don't be too greedy with play #2. Have the price rise and then get out with some profit. Or alternatively plan to stay in until the end.

Before the Stock Split Run Up
After play #2's pullback the stock will slowly rise as it approaches the split date. This may take weeks or months depending on how far out the company sets the split date. The initial burst of activity has past and those wanting quick profit have left. Now it's just build up towards the split and those entering trades now want longer term ownership of the split.

The Stock Split
A couple days prior to the stock split there will be another burst of activity similar to the second play above. This is the last chance to get in for any wanting their shares split. You can take advantage of this expected rise be getting into a trade a week or two prior to the stock split.

After the split
The time after the stock has split presents one last predictable event for us to take advantage of and play #5. The stock has now split and most of the fevered activity has past but the company is still in its strong position. It expected growth which prompted the stock split. Weak unprofitable companies rarely split their stock.

Test, test, test
Each company will behave differently through these 5 parts of a stock split. Some will go through #2 very quickly or #4 will last for longer than a few days. As with any investing plan it is best to paper trade or practice through a few stock splits. Companies will always be splitting stock as they grow and expand so you will not run out of opportunities.

In the stock market there is no guarantee of profit or returns and a very real chance of losing money. It's the goal of the trader and investor to find as many biases or advantages for their timing of entering and exiting a stock to increase their chance of success. The 5 stock split trades I have listed can be added to other strategies that a trader uses to make a stronger more compelling trading strategy.



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