Before you can play a stock split you must have a stock split candidates list. This is where you have to do a little research. Start with the stocks that you currently are watching and ask the following questions:
Has the Company Split Before?
Has the company done a stock split in the last three years? Has it done more than one? How many splits have there been in the last ten years? Look at the company's stock split history can you see a pattern?
* How often do they split?
* Is it at a consistent interval, like every 18 months, every 3 years, etc.
* Do they split in the same quarter? Or the same month?
* Do you notice anything else? Any other pattern?
If the company has a history of splitting, look at how it performed. Check to see how fast the stock moved before the actual split. If there is more that one split you can probably see some common behaviors for the stock. Using history you can predict how the stock might behave this time if it splits. Or at least you may have a clue that the market will expect a similar behavior and the stock price will reflect the expectations of the masses. For example, if a stock has moved up 20 points in the two weeks before a split, for the last 5 splits. You can expect a potential 20 point move in the two weeks before this split too (if a split has been announced).
Check to see how fast the stock moved before the split or how it moved (up and down). If there has been more that one split you can look for patterns in stock performance. There might even be a pattern of upward movement prior to the actual stock split announcement. By using history to predict how the stock might behave this time you could time your trades to take advantage of the historically repeating stock prices. This is a great tool, because you are not the only person who has charts and historical information, everyone has them! If there are obvious patterns, you can predict how other investors will act, which lets you capture profits, because you know what to expect. Of course wisdom and self protection is always required, especially if the stock fails to move as expected. For example:
You looked at a chart of the last 10 years if the stock moved up 20 points in the two weeks before a split, for the last 5 splits. Do you think that the stock will move at least 20 points this time? You can consider getting into the play when it makes sense, and then have fun because the stock will probably move 20 points this time too, unless news or conditions cause a problem.
What If The Company Has Not Split Before?
If the stock does not have a history of splitting there is a rule that I use. I figure that when a stock price reaches $80 to $100 it's a good candidate for a split; especially if the stock has never been that high before. Most companies prefer to have their stock under $80 because it seems more affordable to investors. The thinking is "I can purchase 200 shares of XYZ because it is $48. I'd like to get ZZZ but it is $90 and I can barely afford 100 shares." By splitting 2:1 (two-for-one) ZZZ's $90 stock will only cost $45 per share. Now it fits the price range of more people. Of course 100 shares of a $90 stock is identical to 200 shares of a $45 stock, but it's not the same emotionally. People tend to like the idea of owning 200 shares of something much more than only having 100 shares. In other words, it's just a psychological thing and it does not really change anything else.
Stock Split Candidate Checklist
What are some of the indicators that let us know a company may be ready to split their stock?
* A Direct Announcement, this would make the prediction a fact
* Stock has reached its historical stock split price range
* Company has reached their annual split announcement date
* Recently other companies in the sector have announced splits
* A Shareholder Meeting is scheduled that will vote on an increase in authorized shares
* A Board of Directors Meeting is scheduled
* Stock has excessive Turn OVer Rate (increased volatility, increased volume, or higher stock option activity)
* The stock price is high
Continue Your Education
Now that you have your stock split candidate list, you are ready for the next step. Note that it is NOT placing the trade. You first must create a game plan for your trade. Your game plan will answer questions like: When should I enter? When should I exit? When do I take profits? What do I do if the stock moves against me? Only after you fully understand the trading strategy and have a game plan for all situations are you ready to trade.
If you would like to learn more about my trading philosophy I invite you to attend my trading workshops in person or participate in my free online trading seminars.
Happy Trading... and by the way don't forget to check out my upcoming online web class to be spoon fed the hottest trades available "UPCOMING POWER PROFIT PLAYS".
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