How to Buy Stocks Before They Split

Stock splits are valuable opportunities for traders to take advantage of market discrepancies. There is a regular pattern to such splits. They come during bull markets; they spike in price and volume at the time of announcement and on the day of the split; and they tend to be good year-ahead performers. The investor who receives a stock split simply has gained twice as many shares as she had before. Nothing has changed other than the price of the stock and other accounting statistics that report on a per-share basis. Everything has been proportionately reduced by the split.

Difficulty: Moderately Challenging

Instructions

1. Receive notification of a stock split through announcement by the company. You will also receive notification from your broker that your shareholdings have increased by the size of the split. Calculate the number of new shares by multiplying the old shares by the new announced "pre-split" ratio. Note if the dividend has been increased as well. If so, this means you will receive additional compensation beyond the stock split. If this happens, it is likely that the stock price will remain higher in the future than it was before the announcement.

2. Wait for the momentary surge in the volume and price of a stock to subside before buying. Quite often there is a jump in price that lasts a few days. Volume will usually be stronger. If this does not happen after a stock split announcement, it may indicate underlying weakness in the stock.

3. Buy the stock when prices retreat on low volume. This is a natural retrenchment that will occur after a few days. Do not chase the stock as the immediate average gain from stock splits is less than 4 percent.

4. Hold the stock, knowing that the average stock on the day of the split, probably will have another price and volume spike. Historically, on the day of a split, a stock increases in value four times more than the average New York Stock Exchange (NYSE) stock.

5. Consider holding the stock on a longer term basis. A split stock held for another year will outperform the NYSE average stock by nearly 8 percent. Split stocks represent value. However, if many stocks are splitting after a prolonged market run-up, it may be indicative of a market topping pattern.

Tips & Warnings

• Some stocks split regularly when they reach a certain "psychological" point. Many investors believe they can make more money with a $15 stock than with a $50 stock. Management will call for a split whenever $50 is crossed.
• Never buy a stock right when the split is announced. It will already have spiked higher. Wait a few days for a natural retrenchment.

Resources

• Historical Information on Stock Splits