Stock Split Trading Strategy- A Quick Guide

Stock-Split Trading Strategy is predicated on stocks that split. Most investors believe that stock splits bring value. They only aren’t sure at what point the worth comes in to look for this increase in value.

From a study, the analysts found what they were looking for. A chance of your time to take a position available splits that publishers call “the investment period” or “the sweet spot”. A technique was developed to support the analysis.

The strategy is all based around buying a stock that splits, one to 2 weeks before it splits, and selling it one to 10 days after the stock makes the splits. The precise days to shop for and sell are based on a particular category a stock falls in.

Once a stock is placed in its category, it’s then compared to historical data, which data gives us the simplest days to shop for and sell.

Stock-Split Trading

Stock-Split

This strategy has been active since 1997 and has posted a mean annual gain of 104% and a 182% gain in 1999. In 2000, even with the DOW and therefore the Nasdaq down, the strategy posted a 60.89% gain. The study, which is an ongoing project, takes many factors into consideration to develop various criteria.

From this analysis, proprietary software has been developed to work out which stocks will become picks for this strategy. Not all stocks meet the standards needed to become Strategy picks.

The process starts out through diligent observation of all companies that announce a split. Immediately upon a corporation announcing a split, all pertinent information about the split. (announce data, pay date, ex-date, split ratio, price history, etc.) is entered into the proprietary software program.

The system then determines which stocks meet the standards. The simplest day to shop for a specific pick, and therefore the best day to sell. Active Picks are those stocks that have reached the posted buy date but haven’t yet reached their posted sell date.

How the System Works

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The key to the present system is to take a position altogether the posted picks and invest in a good number of shares. For instance, if your investment dollars allow, you would possibly plan to buy 100 shares of every pick.

The rationale for the equal number of shares is thanks to the very fact that nobody can predict which stocks will substantially increase in value during the investment period. And which stocks will only increase slightly or decrease in value.

So if you invest in emotion, you would possibly buy 10 shares of stock A, and 100 shares of stock B. during this scenario, if stock A increases substantially but stock B decreases even touch, you’re getting to lose.

The Finest Example

future stock market

Stock A is priced at $100 and you invest in 10 shares for a complete of $1,000. Stock B is a mere $40 so you invest in 100 shares for a complete of $4,000. Now stock A goes up a healthy $10 for a profit of $100. Stock B goes down only $2 for a loss of $200.

You’re $100 within the hole. However, if you had invested in 10 shares of every stock, you’d have made a $100 profit on Stocks A and only a $20 loss on stock B for a complete gain of $80. Likewise, it’s best to take a position altogether the picks instead of picking only certain ones.

This is often called “cherry-picking,” and within the Basic Strategy cherry-picking usually doesn’t work. Nobody knows which stock will go up and which can go down during the investment period. Trying to guess which posted picks will work best is simply that – a guess.

But investing altogether the picks is investing during a proven strategy with a proven diary. Hopefully, now you see why the strategy is predicated on all the picks and equal shares. However, the ultimate decision is up to the individual trader and that they should do what makes them comfortable.

Stock-Split Investment Calculation

FSM

The good news is, a trader can choose the number of shares that most closely fits his/her investment dollars. Whether a trader purchases 10 shares of all the picks or 1,000 shares, the share of gain is that the same. In fact, this doesn’t take under consideration commission.

Obviously, a commission structure is to your advantage. In today’s market environment, there are many low commission online brokerage firms to require advantage of. In fact, there are now some brokerage firms that provide free trades if you’ve got a minimum balance in an account.

For more leverage and even bigger gains, you’ll invest in options contracts for a fraction of the value of the stock. Options are available contracts of 100 shares each. A stock that’s priced at $100 for instance, could have options priced at $10 each. So a contract of 100 shares equals $1,000.

This suggests that for $1,000 you control 100 shares of a stock that otherwise would have cost you $10,000. A $2 up move within the stock might get you a $1 move within the option.

Believe this- this suggests that while you’d get a 2% move within the stock if you invested in options, you’d get a tenth gain.

Overall: Stock-Split Trading

FSM

Options are an exquisite leveraging tool but they have risks. If you’re not well familiar with options, but just like the idea, read our informational page on Trading Strategies or attend the Chicago Board of Options Exchange and study their site. There also are many books at your bookstore, or library on stock options to know about the stock split, and reverse stock split trading 😉

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