There is a theory that stock splits are a bullish sign in the stock market. The theory says that stocks that split occur because their stock has increased so rapidly that they need to lower their price in order for the average investor to be able to invest into it.
This means that the company should be a pretty strong company and the same momentum that carried them up to that high level before the split will likely push them back up to that level after the split.
It is a good theory and seems to work when you look at historical stock splits and their effects, however just because a stock has just split does not mean that it is a good investment and will make a great return for their investors.
Looking at a few other indicators can help an investor filter out good trades and bad trades is still a good idea. One of those things is momentum investing.
In trend following a trader attempts to get into stocks that are going up and hold onto them for as long as those stocks continues to go up. That is fine and dandy, but how does it apply to stock splits?
Well one thing I will do when I hear that a stock has split is to keep it on the side. Then I’ll watch the stock to see if they give ma a buy signal and they look like they are going to start making a big upward move.
If it does then it has the potential to be a very profitable trade. Hopefully the stock that has just split will give off some extra buying pressure on the stock.
Trading Stock Splits can be a powerful way of making a great return, but only when combined with other strategies. That way all the odds can be put in your favor which is always a good thing.
