Historical Stock Splits And Their EffectsBy looking at historical stock splits and seeing how they impacted stocks in the past an investor can get a good idea of what to expect in the future. Most investors will agree that stocks which have just gone through a split will do better than stocks that haven’t split, and therefore better then the market as a whole. It is a pretty simple idea, stocks split after stocks have gone up so much that they become expensive for the average investor. Once a stock splits it should benefit from the same momentum that carried them up to the presplit price to began with. I thought it might be interesting to see just how well stocks that have split in the past have done after their split. So here is a short list of some past stock splits on 5 big companies, Microsoft, Pepsi, Coke, McDonalds and Yum Brands. 
It would appear that stock splits play some role in determining the future price movements of the stock. However this data can be considered skewed for many reasons. First of all most stock splits tend to happen during bull market. It is extremely rare to see stock splits in bears markets because nearly every stock is being affected by the downward movement, and lowering their price so the average investor can get into it is normally not a problem. Another thing that could have tainted these results was that every company on this list became a successful business. The problem with backtesting fundamental factors such as stock splits is that they tend to only look at the stocks that are still around. It may be for every 3 successes stories 1 stock went completely bankrupt and that makes it hard to backtest because they don’t exist anymore. Trading Stock Splits Back when stocks where splitting I used to look for recent stock splits to add to my watch list. They really do give an extra signal of strength. But don’t take it as a fool proof way of making a fantastic return. Remember using common sense is a trader’s best friend. If a stock splits and then starts trending ever lower, it may not be something you want to get into. But if it splits and then breaks off onto new highs it could be signaling that the strength is still there. So, take these historical stock splits with a grain of salt. They may be something to look at when finding strong stocks to invest into, but they should not be your only reason for buying the investment. |
