What is a Stock split?A stock split is when a company decides to lower the price of their stock by splitting it. There are various types of splits 2/1’s, 3/1’s, 4/1’s, and the very rare 5/1’s. Let us look at what these numbers mean. When you are in a stock that is about to have a 2/1 split you get 2 shares for every 1 share you own. No, you don’t double your money. Your stock price gets cut in half too. In other words if you owned 100 shares of XYZ stock at $60 now you own 200 shares at $30. Oh, boy! Nothing exciting happened at all.I know what you’re thinking “if nothing happens during the split why should this concern me?” Easy, stocks that just split tend to move up faster than stocks that haven’t. When VIP split it was trading at $22. A few months later VIP was at $45. This gave off a 104% return in just a couple months. RIMM was at $83 after the split and peaked at $133 3 months later. This gave a 60% return in 3 months. When stocks split they tend to go up.
Now how should you trade these? First of all we have to be in a bulls market. A stock that just split will tend to do better than the average stock. If the average stock is going down 20% that’s not saying much. If you are in a Bulls market you can find stocks that split and have good fundamentals. Then use technical analysis to find the best entry and exit points. No matter what strategy you trade it always comes down to Technical Analysis.
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