Should You Buy Stock Before Or After It Splits
Should I Buy A Stock Before It Splits? Investors and companies alike view stock splits as positive events. Look no further than the 5.5% pop in Amazon shares when it announced a 20:1 split after the market close on March 9.
should you buy stock before or after it splits
Stock splits tend to attract the attention of many investors, so lots of companies, like Tesla, use this tactic to generate a buzz and entice more investors to the company shares. Some companies perform stock splits on a regular basis. Investors are happy to continue accumulating vast amounts of stocks in this way.
On the other hand, splits are also considered positive from the standpoint of buying before the split. More investors might also want a share of the pie, thereby eventually leading to a raise in share prices.
Apple was trading around $500 per share before the split. Now, investors who want to get in on the technological stock scene can do so in this giant for around $125 per share. The stock split also helped investors who want to get a piece of the electric car giant who may not have prior to the 5-for-1 split.
Few headlines grab investors' attention like news of a stock split from a massively successful company. There's often a tremendous amount of movement in stock price around the split date, even though stock splits have no direct effect on the value of shareholders' interest in the company.
Tesla last split its stock less than two years ago and it wasn't alone in doing so. Apple (AAPL 0.99%) also conducted a split around the same time in 2020 and, as another popular and successful company, offers a relevant point of comparison for investors. As we can see in the below chart, there was an enormous amount of movement around both splits, with Tesla being the more volatile.
Both stocks made significant gains in the lead-up to the split, and both settled back toward the announcement date's price shortly thereafter. Apple's post-split low, which came 14 trading days after the split, while Tesla's took just six.
Those who didn't buy or add to their Apple holding ahead of the split date could have done so at nearly the same price as the stock's announce-date close. The same pattern is seen in Tesla stock: investors were much better off waiting to add shares until after the split and its accompanying hype.
The bottom line: In a perfect world the best time to buy is before or on the announcement date. However, if we miss that trade, it pays to wait patiently until after the split to buy or add to your holdings.
Alphabet (Nasdaq: GOOG, GOOGL) stock will split 20:1 after the close of trading on Friday, July 15. When trading opens on Monday, July 18, owners of the stock will have 20 times as many shares, each worth 5% of what a share was worth the day before.
Alphabet has split its stock only once before, when it effected a 1998:1000 split in 2014. Shortly after the split, Alphabet issued its first class C shares, issuing one C share for each A share held.
GOOGL has almost, but not quite, as much adulation from analysts. Fifty-three analysts follow GOOGL, and in May, 16 rated it a strong buy, 36 rated it a buy, and one said investors should hold the stock. This resulted in a recommendation rating of 1.7, slightly poorer than GOOG.
Several high-profile companies have enacted stock splits in recent years, such as Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOG, GOOGL). While a stock split does not change anything fundamentally about a company, it usually conveys that a company is financially healthy. As a result of a stock split, the number of shares outstanding increases as well.
If the widely debated Efficient Market Hypothesis (EMH) holds true, then trading on stock splits will not provide alpha. The EMH argues that current prices reflect all available information. As a result, consistent alpha generation is impossible.
Ultimately, investors should invest in companies that they believe have excellent growth potential. While stock splits are generally seen as a positive, they should not be the centerfold of an investment decision. At the end of the day, trading based on stock splits does not seem to be a viable investment strategy.
But examining the full list of stock splits over the past 40 years highlights some interesting results. Overall, the stocks of companies that split their shares have significantly outperformed their benchmark over the subsequent months, earning an average of 1 percentage point more than the benchmark over the six months after the split.
To undertake this study, Stephanie Fincher and Eric Dzik (research assistants at George Mason University) and I examined a total 3,480 stock splits and reverse stock splits since 1980 for U.S. stocks listed on the Nasdaq or NYSE. We looked at the one-month, six-month and 12-month returns for investors who bought stocks that had just split or been part of a reverse split.
The message here for investors is clear: We found that stocks earned 1.18 percentage points less than their benchmark on average in the month after a reverse split, 7.57 percentage points less after six months and 12.02 percentage points less over 12 months.
The Friday announcement came just one day after Tesla's shareholder meeting at its new headquarters in Austin, Texas. Tesla said the stock split can "help reset" share prices so that employees "have more flexibility in managing their equity" and to be "more accessible to our retail shareholders."
But Bank of America research analysts found that since 1980, S&P 500 companies that announced stock splits "significantly outperformed the index 3, 6, and 12 months after the initial announcement." Over 12 months, stocks that announced splits gained an average of 25% compared with a 9% gain in the S&P 500.
Alphabet stock registered a slightly bumpy start when it started trading at its split-adjusted price of about $113 on Monday, July 18, falling by more than 2%. Some analysts held out expectations that it will recover to increase in value, the way Apple and Tesla both did after their most recent stock splits in 2020.
After Apple's four-for-one split, shareholders will have four times the number of shares as before. The value of each share will be quartered, however, meaning that the value of a shareholder's stake will remain unchanged. Apple stock closed at $438.66 on Tuesday.
"For popular stocks like Apple, the lower share price makes it attractive to investors who couldn't afford higher share prices, but want to own a piece of the company," said Caleb Silver, editor-in-chief of Investopedia.com. "Stock splits are seen as a sign of confidence from a company, and considered a response to more demand for its shares from investors."
"To be crystal clear, however, and as proven by grade school algebra, stock splits have no impact on the value of a company," said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
A company may initiate a reverse stock split if they believe the stock price is relatively "low" or to avoid being delisted (some exchanges have minimum share price requirements). In a 1-2 reverse stock split for a stock trading at $2, for example, you would receive 1 share for every 2 shares you owned after the split and the stock price would double to $4. Again, the total value of your investment would not change due to the stock split.
The critical thing to understand about a stock split (including a reverse stock split) is that the proportional ownership of your position is unaffected by the split, and it is the market that will determine the impact on the total value of the position. While the number of shares owned changes after a stock split, the split itself does not change your investment value.
For example, suppose you own 100 shares of a company trading at $200 per share, for a total value of $20,000. All else equal, if the stock split 2-1, you would then own 200 shares of the company at $100 per share after the split for the same total value of $20,000.
It can be the case that a company's stock price may rise immediately after a stock split announcement (due to this management signaling effect). There is some evidence that companies who split their stock outperform the broad market over the near term.*
Of course, this does not mean a stock will rise after a stock split announcement or when it goes into effect. Remember, a stock split in and of itself does not impact your holdings' value. Without strong earnings or dividend growth following the stock split, any gains made by the stock following the stock split announcement would likely fall back to (or below) the presplit announcement.
A company will typically announce a stock split several weeks before the split actually occurs. Consequently, there is a window between the announcement and the stock split. You would not want to base your decision to buy (or sell) a stock based solely on a stock split. A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company. If you have determined that you want to buy the stock of a company that has announced a split, your decision when to buy can be based on your research, objectives, risk constraints, and any other considerations relative to your strategy.
A stock split essentially makes the stock more accessible and flexible. Stock splits can come in any ratio -- some common split ratios include 3-for-1, 5-for-1 and 20-for-1. In each case, on the official day of the split, the number of shares in circulation is multiplied by the split ratio and the value of the stock is then adjusted accordingly.
According to Bank of America research reported by Reuters, stocks that split gain 25% on average in the following 12 months, compared with 9% growth in benchmark indexes. This additional 16% of growth could be attributed to many factors besides the split itself, though, including organic company growth. Often, there's a lot of trading executed around splits, creating volatility both before and after the split itself. With a super volatile stock like GME, the split may create some interesting price action. 041b061a72