Stock splits are one of the most anticipated stock market events because stocks tend to perform better and go up. But do stocks always go up after a stock split? What effect do stock splits have on the company and its shareholders?
Today, we will look at the consequences of stock splits for the share price, and what investors should know in anticipation of stock splits.
What is a stock split?
A stock split happens when a company decides to increase the number of outstanding shares of the stock. This allows the company to make the price of an individual share decrease, which makes it more attractive for investors to buy the stock.
For example, a stock that is trading at a price per share of $1,000 might not attract the interest of investors with smaller portfolios, since they would have to allocate a significant percentage of the portfolio to a single stock. By splitting the stock, the number of total shares increases, and the stock price decreases.
Additionally, if the number of shares increases, it will also increase the liquidity of a stock. A company with a stock price of $1,000 will have a lower volume than if the stock was $10.
Does a stock go up after a split?
Although a stock split has no effect whatsoever on the value of the company, stocks usually go up before and after a stock split. Studies have also confirmed this, by pointing out that companies who split their stock tend to have better returns overall.
Do stocks usually go up before a split?
Stock split announcements also push stocks higher, and the available research also provides proof of this.
Why do stocks usually go up after a stock split announcement?
There are a few reasons that explain why stocks tend to go up after a stock split announcement. When a stock splits there are more investors that will be interested in investing in the company. The reason is mainly to do with the lower share price, which means they do not have to commit the same amount of capital when buying the stock.
Investors know this, and when stock splits are announced they position themselves by investing in the stock, expecting that the lower price will bring the attention of retail investors. Traders who are also aware of this phenomenon also tend to take long positions after stock split announcements, and this creates an upward movement for the stock that usually ends a few days after the stock was actually split.
Despite stock splits not having any effect on the company, or its shareholders, they usually tend to create a lot of attention around the stock, and it tends to go up.
Do stocks usually dip after a split?
Stocks do not tend to dip right after the stock split, but a few days after. Once the investors that have been waiting to invest in the stock post-split are in, the stock tends to dip, as the traders and investors that position themselves to profit from the split exit their positions.
Should you buy a stock before or after a split?
According to the research available, there are several studies that show that stocks have abnormal returns following the stock split announcement. For that reason, the best time to buy is right after the stock split is announced. This gives you enough time for other investors to place their trades, and you can wait until the day when the stock splits and sell then or a few days after.
When should you sell a stock that is splitting?
The best time to sell a stock that was split is right on the first day when it splits, or a few days after depending on the trading volume, and how the stock price moves. Usually, if there is a spike in volume traded on the day of the split, it might be worth holding on to the shares one more day or starting to sell part of your position.
Do shareholders make or lose money when a stock splits?
Shareholders do not make or lose any money when a stock splits because it does not change or affect the value of the company in any way. Therefore, shareholders do not lose or make any money in the process. However, when a stock split is announced, there is clear evidence that stocks tend to go higher. In that case, we can consider that stock splits can actually have a positive impact on shareholders.
Additionally, a stock split also increases the liquidity of the stock, which overall is a very positive sign for any shareholder of the company.
Is a stock split good for shareholders?
There are a few advantages of stock splits for current shareholders of the company, including:
- Increased liquidity
- Attract new investors
- Boost the stock price
One of the main benefits of a stock split is increased liquidity. Since there are more shares available to trade, the trading volume will be higher, and this is a clear benefit for shareholders.
Attract new investors
When a stock splits it becomes more attractive to investors, because they do not have to commit as much capital to buy a single share, and they can still diversify their portfolio.
Boost the stock price
Research has continuously found that stock splits tend to create abnormal returns, and this also benefits shareholders of the company.
While stock splits have absolutely no impact positive or negative on the fundamentals of the company, they tend to drive the price higher. Investors who are looking to profit from short-term movements could look at stock splits as a way to position themselves for a profitable short-term trade.