Do stock splits affect the movement of a stock? Most investors believe that stock splits do affect the return a stock will have in the next few years.
It does make sense when you think about it, stocks only split after the price of their stock has been run up so high that it is harder for the average investor to invest into it. By splitting the stock a company can make it more affordable for the average investor.
Nothing has changed, so eventually the stock should be pushed back to that high price by the same forces that pushed it there to began with, at least in theory. There is also the psychological aspect. If a $100 stock comes down to $50 investors who are used to seeing the stock around $100 will consider it a bargain at $50 even though nothing important has really changed.
If you look at the historical stock splits and look at the impact they seem to have on the stock there may be some truth to it. After all stocks that are spliting are usually outperforming the market to began with.
However that does not mean it is the only thing that matters when deciding if an investment is good or not. There are many different things to look at when deciding if a stock is going to beat the market in the long term. For instance if the stock is a fundamentally strong great dividend stock, so much the better. That is really putting all of the odds in your favor.
Another even more powerful strategy would be to combine stock splits with momentum investing. If a stock splits and then starts to fall there may be something else going on and it might not be such a great investment.
But if the stock splits and then starts to head up again it could be a signal that the stock is continuing its path of growth and will likely be a great investment as time goes by.
