The concept of the split applies only to the stock market and in some cases may impact on the charts with a gap or change. The fact that the company is going to conduct a stock split should cause the trader to think over the following questions:
- why do companies need it (it’s additional costs);
- how to react to this news market;
- can a trader make money on it (or on the contrary lose money).
Split of stocks — the event is ambiguous, but it is often used in a large company. A vivid example is Apple, MasterCard, Google. And as you can see, the attractiveness of their securities has not changed.
Split of stocks: implications for investor
The stock split is the splitting of portfolio securities with preservation of shareholders. In other words, if the capitalization of $ 1,000 in circulation were 10 shares at $ 100, then split 1:2 appear in circulation 20 shares at $ 50.
For the company the most important aspect is liquidity, i.e. the velocity of circulation of its shares on the stock exchange. The more a person can purchase a security, the higher the liquidity. And it’s not so much volume, how much the price of the security: reducing the price of 7-10 times, companies make the paper more accessible to small private traders, thereby enhancing the interest and increasing the liquidity.
How to behave in a price chart? Yes, in principle in any way. More precisely, with high probability will go up. After the stock split the investor in fact will not possess a smaller number of securities since the company’s capitalization remains the same. In fact, he just gets his hands on two papers instead of one. To avoid the subsidence of schedule of prices after the split (after the change shares market capitalization remains the same), the concept of “adapted closing price” was invented. After the split, the program automatically divides all prices before the split by a factor of fragmentation, thereby maintaining schedule. But the availability of securities increases investor interest as a result of growth in demand, the price of securities grows.
A gap can occur only in one case: if the split of shares held on weekends and the value of securities is of interest to private investors.
What should investor do:
- to follow the news. The stock split is beneficial only to large companies which securities over the past 10-20 years have increased in price tenfold;
- knowing that a large company is ready to split, it makes sense to consider buying shares;
- do not panic if the price chart has gone. Maybe it makes sense to raise the history of the stock?
Summary. A stock split does not carry to the trader no risk and can even be a source of additional earnings. Some companies refuse on principle to this procedure, thereby remaining interesting for institutional investors (the larger package of a limited number of securities more difficult to manipulate). However, most corporations still use this procedure.