Stock splits are triggered when share prices increase to levels that are much higher compared to price levels of similar companies in their sector. The motive behind stock splitting is to make shares more affordable to small investors. The underlying value of the company has not changed, but the opportunity to purchase stock in a particular company has opened up. Splits give a signal to the market that a company’s share price is increasing. Investors assume growth will continue which encourages buying stocks.
Companies realize that stock splits are cost effective marketing tools. Splits give shareholders the sense of greater wealth and the price is made more attractive to the average investor. This might just be a “thought” or psychological feeling, but remember the market is a place of speculation and psychological “feel good.”
When a company issues a stock split it typically means outstanding performance in the past quarters. Companies that split their stocks usually have fast growth and high momentum making their offerings highly desirable.
Companies use stock separations to make more shares available for investors. The thought behind this strategy is the more shares available the less impact there is on the price of the stock as investors buy and sell.
The primary reason for splitting a company’s stock is supply and demand. Market research has shown splitting stocks or the “two nickels for a dime” premise increases demand and higher prices are the result. Hence more money flows into a company’s coffers.
How Stocks Split
Watch for indications of a stock split by following market trends and news.
1. Pre-announcement of splitting stocks will encourage a stock price to climb. The amount of increase will accelerate to take position in specific entry levels. Watch the investor and stock market journals to determine which stocks are likely to split.
2. On a split announcement, stocks jump sharply and increase in value during the next few days. Read stock market email alerts to obtain a head start on potentials and to lock in profits.
3. A few days after the announcement, stocks begin to drift into a dormancy phase or level off. Recent gains will be consolidated.
4. Generally there is a presplit run on a stock. The stock comes out of the dormancy stage and the price accelerates as it heads into the actual split. There is generally a five to fifteen day window when the price moves. When a stock hits a certain price, jump right in a make your investment.
5. The day the stock splits comes the announcement to the public that a stock has split and is now available for investment. Watch lists and learn about pre-announcement, dormancy, and pre-split stages to know when to make your move.
It is advisable to pay attention to stock splits. Dividing stocks is a consequence of a company’s outstanding performance. Those companies that split their stocks are the fastest growing and most secure. Watch for announcements and learn when pre-announcements are available. Invest when the price is low.