Many different stock trading methods are used effectively in the marketplace. The first step towards making money with any one of them is to understand the reasoning beneath it. Once you comprehend the underlying trading logic, you can move on to drafting a plan to enter and manage the trade successfully.
Trading stock splits rank near the top of our “preferred trading” list. This is despite the fact many financial writers still think stock splits have no real value. They believe that stock splits are nothing more than a numerical event – two nickels for a dime.
While this is technically true from a mathematical point of view, trading stock splits isn’t just about arithmetic. Most investors base their decisions on emotions, not hard data. In the real world math is just one reason people buy stocks.
As an overwhelming rule, stock splits have a positive emotional affect on current shareholders and potential investors. Any stock split announcement gives cause for celebration, as corporate management generally present the news in the most upbeat tone possible. This is relatively easy to do because a dramatic increase in the stock price is the primary reason most companies declare a stock split in the first place.
Splits are a near perfect way to generate enthusiasm by advertising investor success. While lowering the price with a split provides affordability for new investors, current shareholders enjoy the pleasure of watching the number of shares they own double or triple overnight.
Again, the positive perception of splits tends to fuel investor emotions. Fortunately the mathematical results found in the performance statistics of stock splits are also very favorable.
Companies that split repeatedly have a lot in common with each other. They are profitable businesses, they are among the leaders in their sectors, and they have a knack for catching the attention of investors. These stocks go up, they split, go up some more, and then split again. This winning cycle repeats itself over and over.
Bottom Line: Though a stock split in and of itself may not increase the dollar value of a stock, the positive publicity surrounding these companies does attract new investment dollars. The increased demand drives prices higher, creating an exciting emotional environment that appeals to even more buyers.
The easiest Split Trading tactic is to simply buy stocks that have recently split. Also, traders who are more familiar with the different stages of the split phenomenon buy shares at specific times based on the strategies we’ve developed over the years. RightLine has been fortunate to help create several popular split-trading methods that take advantage of opportunities first exposed by pioneers such as Julian Salas many years ago.
Salas’s early research in the field led to the six phases of a stock split which we currently teach at RightLine.net. Long time readers will remember a time when our report was called The Right Line Split Report. Though we’ve since changed the name somewhat, we still include information to trade splits successfully.