Many people jump when they hear that a stock is going to split. There is no reason to get excited about a split. All it means is that you’re getting twice as many shares for half the original price so in effect you’ve gained nothing. However, in the very long term, a stock that has split many times can give you substantial returns. But for the moment we’re not concerned with investing over long periods of time. So the truth about stock splits is this. A stock that is about to split will grab a lot of attention about two weeks before the actual split. Once the split occurs most stocks drop in value. What we need to do is find stocks that are about to split within the next few weeks, there are many sites offering this information, for this example we’ll use yahoos splits calendar which you can find by doing a search on Yahoo.

Once you’ve found your list of splits you can enter them into any online stock site that will keep tabs on your stock for you, there are many out there, just do a search on any of the main search engines. You can save them here & keep an eye on them over the following weeks. Some of these sites can organize up to 30 charts for you at any one time onto the same screen so you can view all your upcoming splits in one glance thus saving you a lot of time. Once you see a stock moving up about two weeks before a split is due then this is a good candidate for trading. Some traders only trade Stock splits using these trading strategies & make a fortune doing so.

Stock splits present one of the most misunderstood aspects of the stock market. Psychologically stock splits feel like you have gained value, but in reality you just own twice as much paper. Much the same as if you changed a ten-dollar bill for two five-dollar bills. Once a stock splits 2-for-1 you have twice as many pieces of paper (shares) as you did before. But your shares still represents the same percentage of the total outstanding shares of the company as it did before.

Investor psychology motivates the issuing company to do this. Stocks are generally sold in lots of 100. When a stock splits it’s more likely to the needs of a small investor. For instance suppose a stock is selling for $60 a share. A lot of 100 shares would cost $600. If this stock splits 3-for 1, the price of a share goes from $60 to $20; and the cost to 100 shares goes from $600 to $200. Suppose a small investor has $400 he would like to invest. A hundred shares for $600.00 is out of his reach, but 200 shares for $400.00 meets his needs exactly.

Although there are many ratios a stock could split, the most common splits are 2-for-1, 3-for-2, and 3-for-1. Also possible is a reverse split where a company reduces the outstanding shares. A reverse split results in each holder being issued less shares than before. A reverse split gives you less paper but you still own the same percentage of the company. One reason a company might decide to do a reverse split is that price per share is so small it looks like a poor investment. If the price of a share becomes too low it might get de-listed by the stock exchange. Other reasons for a reverse split could be to push out minority stockholders, or as a way to go private.

The biggest advantages of a stock split is greater liquidity. As mentioned before stocks are sold in lots of a hundred. So the lower the price of the stock, the more likely they will meet the criteria of a small investor’s budget. The bid/ask spread is the difference between buying and selling prices. Typically the smaller the price of a stock the smaller the bid/ask spread. A high bid/ask spread can put off larger investors. Psychologically, a split is perceived as bullishness. The spit is seen as a sign that the company is doing well. A stock split generally sets off a short-term rally, although the market usually normalizes shortly.