The most important thing to remember about a stock split, be it a 2-to-1, 3-to-1 or even 5-to-1, is that the fundamentals of the company do not change. There is no intrinsic value change. A split is akin to trading two $5 bills for one $10 bill. That hasn’t stopped investors from chasing splits to play before the announcement or even after the split occurs, but critics maintain that without a fundamental value change, the advantages of a split are purely psychological. Since the entire market moves based on psychological influences, advocates of split trading say that’s an endorsement of split trading, not a drawback.
Track sectors in your trading. Whether it makes sense or not, market movements tend to linger in a sector, such as technology, before moing on to another sector. One rock star company can lift an entire industry. For example, if Oracle--an enterprise software giant--is on an upward track, many of the companies in competition with Oracle will also see a boost. These market sector leaders are often good candidates for a split.
Check for companies trading at or near their all-time highs. Trading at a high share price can indicate the overall good health of the company and a positive forecast for its future, but it can also signal excess demand for a short supply. Companies in this position will often issue a split to meet the demands of individual investors looking to buy in to the company. A split can double or triple the number of shares available, so splitting can help a company raise money for needed expansion when its share price had otherwise hit a wall.
Watch the sector for other splits. Just as market movements are often sector-centric, splits tend to happen quickly within a sector from several of the key players. If you see an announcement from one company, scan the list of companies that compete with it, or that are chasing that market leader, and then pounce.
Look into a company’s split history. If several factors converge--a stock is reaching all-time highs; there are other companies in the sector that have recently split--check to see if your chosen candidate has split in the past under similar circumstances. Historically, if a company has used a split as a funding mechanism in the past, they are likely to employ that strategy again, so if you are chasing splits, that company could be a winner for you.
Sign up for a tracking service. While most financial theory pundits still say chasing splits is fruitless, the emerging science of behavioral finance has spawned a huge number of services that specialize in targeting companies who are poised to split, or those who have recently split where investors can benefit on the other side. Beware that these services are guessing just like you, but they are doing it based on a mountain of data, so if your risk tolerance is high, try handing the reins over to a professional.