A split is the splitting of a security with a high value into several smaller, cheaper assets. In this case, the price of the new shares is equal to the value of the underlying asset.
Examples
Split can be carried out in different proportions: 2:1, 3:1 or even 100:1 depending on how much the issuer wants to reduce the price of one share.
For example, a company has 100,000 shares outstanding at $1,000 each.
The company’s capitalization is 100,000 * 1,000 = $100,000,000.
In a 5:1 split, the number of shares will increase to 500 thousand and their price will simultaneously decrease to $200 per share.
At the same time, the capitalization will also be 500,000 * 200 = $100,000,000.
Why a stock split is performed
Often the split is carried out by issuers whose shares have significantly increased in value for individuals. Such a procedure is often carried out by American companies, as retail investors play an important role in the U.S. stock market.
At the end of 2023, six splits took place there
How will the split affect the share price?
Usually, a split does not happen immediately, first, there is an announcement with a final date. In most cases, it takes about a month. During this time, the stock rises strongly.
This trend could be seen in Apple (the last split was in August 2020), Amazon (June 2022), and Tesla (August 2022). What all of these stocks have in common is the fact that they are up 15% to 25% since the split was announced. As described above — this is seen as a bullish signal at the time of the announcement and in the long term.
However, after the split itself, the stock drops noticeably the whole following month. The correction can be from 10% to 20%. To explain this phenomenon is quite simple — “Buy the rumor sell the news”. Speculators actively drive the price up, then sell the accumulated volume, which causes a noticeable selling pressure. At this time, “households” have not yet bought enough shares to drive the stock up.
Short-term traders have a strategy that involves opening a short on the day of the split. The position is held from a couple hours to several days. The stop is placed for the daily high. However, you should be careful, as any strategy can misfire. We strongly recommend using Stop Loss and Take Profit orders to reduce the risk of capital loss and maximize profits.
The nearest split among the “Magnificent Seven” companies traders will be able to observe in a week, on June 10, in NVDA shares.
On Movo there is an opportunity to trade this asset and use the multiplier — to multiply the potential profit. This event is sure to be one of the most interesting this summer.
In the long term, a stock split is a super bullish signal. Therefore, an affordable share price will encourage more investors to put capital into reliable companies.
Conclusion
A stock split has no direct impact on the return on investment — at least at the time of the procedure. For a trader, the split is beneficial immediately after it is carried out. After all, a lot of new opportunities open up for him — to trade a larger part of assets and earn on shorts.
Download the App