Stock splits occur when the price of the stock lowers and investors get more shares to make up for the lowered price. So do they actually affect how strong a stock will be in the future?
Most investors and traders believe that splits will in fact cause a stock to outperform the rest of the market for these two reasons.
1. It Shows Growth
If a stock has already split it shows that the company is already growing and that can have an enormous positive affect on a stock. It makes sense most companies that split once will probably keep heading up and keep splitting again and again in the future.
2. It creates a psychological level
If a stock is trading at $100 and has a 2 for 1 split, it would be trading at $50 now. Even thou there would be twice as many shares people will still see $100 as a psychological level. The stock was ounce trading at that level, so it should trade at that level again right?
This causes new buying pressure to come in and can also influence the price of the stock.
Stock splits have been shown to outperform the market in general, but you need to remember not to take it as a standalone signal. It is much more important to rely on the trend and the fundamentals then to just buy a stock that has just split and hope for the best. But that doesn’t mean you can’t look for stocks that are splitting to increase your odds of being profitable.
For more on stock splits visit http://www.stocks-simplified.com/Stock_Split_Definition.html
For some stock tips visit http://www.stocks-simplified.com/stock_tips.html
When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.