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#1
12-09-2006, 07:00 PM
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Stock splitting
I got lucky and found Company A that did well and its stock price was on fire. Now the company announce that its stock will split within a week or so.
My question is: Do I continue buying the stock upon this announcement because after the split, the stock will be cheaper (not in the sense that it's undervalued but more like the general population will think it's cheaper because it has a lower price) and will cause a high demand for it, thus raising the stock's price? I have looked over many companies' history and it seems that after a stock split, these companies' stocks bounce right back (at least more often than not). Last question: Does anyone know if there has been a research on buying all stocks that announce they will split their stocks soon and what its theorized annual return would be? Thanks. PS. I thought about the "Efficient Market" theory in that the news of the stock splitting was probably corrected in the price of the stock. However, the "Efficient Market" doesn't prevent the normal Joe from buying a stock due to its low price compare to before and thus raise the demand for it. 
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#2
12-09-2006, 09:22 PM
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Re: Stock splitting
There has definitely been research. I dont know what it said though! Go find it, its there. In my experience, in certain environments, it works the way you are saying, i.e. the internet bubble. I think what the research probably says is that any positive effect is more or less immediate, so that you cannot capture it by showing up after the announcement.
The only legitimate rationale for making this a positive effect would be signalling, i.e. this is 100% in management control and if they thought bad things were coming and teh stock was going lower, they would not announce a split.
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#3
12-10-2006, 06:09 PM
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Re: Stock splitting
Even the normal Joe is not that stupid. Charts are automatically updated to reflect the split. If Joe looks up last week's price, it will say 30, not 60. If he looks up the 52 week high, or any other price, they will all be split-adjusted. Some stocks might still fly, but the internet bubble is over.
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#4
12-10-2006, 07:58 PM
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Re: Stock splitting
[ QUOTE ]
Even the normal Joe is not that stupid. [/ QUOTE ] Didn't Buffett say 99% of all investors would be better off investing in index funds? Oh right, the normal Joe thinks he can do better than indexing.
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#5
12-11-2006, 02:36 PM
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Re: Stock splitting
Most of the money that's been made by longing stocks the day after they split isn't available anymore. Enough professionals saw it happening, and frontran the event, by buying up the stock from the split announcement until the split, causing the actual split event to experience an unwinding of positions from these holders, resulting in a selloff.
This is the very general trend these days. Split's more often than not result in a sell-off, followed by a bounce back to fair value. The people that still buy on the day of a split are providing liquidity to the sellers who bought on the announcement (or, often enough, before, due to being tipped off). At any rate, this is not a very reliable pattern, and I personally don't believe it has the risk/reward characteristics to justify trying to follow. If you're in the stock for the long haul (3+ months, anyway), I wouldn't recommend you do anything.
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