Should You Buy a Stock Before It Splits and Why?

Buying a stock before it splits can be a great way to increase your returns, but it's not a guarantee of success. In fact, research has shown that buying a stock before it splits often leads to higher returns than buying after the split.

Stock splits can be a sign of a company's growth and health, with 75% of S&P 500 companies splitting their stock at least once. This is because splits often signal that a company is confident in its future prospects and wants to make its stock more affordable for investors.

However, it's essential to remember that a stock split doesn't change the fundamental value of the company. The split is simply a way to adjust the stock price to make it more appealing to investors.

A stock split can increase the number of shares outstanding, which can lead to higher liquidity and trading volume. This can make it easier to buy and sell the stock, potentially leading to more opportunities for profit.

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Stock splits are a way for companies to adjust their share prices, and they come in two main types: forward splits and reverse splits. Forward splits decrease the share price and proportionately increase the number of shares outstanding.

A 2-for-1 stock split, for example, means a shareholder would own double the number of shares, each worth half as much, so your investment value remains the same. This has happened to companies like Nvidia and Broadcom this year.

Reverse splits, on the other hand, increase the share price and proportionately reduce the number of shares outstanding, so your investment is unchanged. A 1-for-4 reverse split, for instance, would make every four shares become one post-split and then priced four times higher.

Companies like Walmart, Chipotle, and William Sonoma have also undergone forward splits this year, which can be a sign of a company's growth and stability.

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You can't buy a stock before it splits and expect to make a profit, unfortunately. Insider trading laws prohibit trading on knowledge of a stock split prior to its public disclosure.

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The Efficient Market Hypothesis (EMH) suggests that current prices reflect all available information, making it impossible to generate consistent alpha through stock splits.

Stock splits are usually announced a few months before they actually occur, and any appreciation in price is factored into the stock price by the time the split happens.

Companies like Amazon have seen significant price appreciation in the long term, but it's essential to remember that outperformance is no guarantee, and stocks see negative returns about 30% of the time 12 months later.

Investors should focus on companies with excellent growth potential, not just the promise of a stock split.

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Stock splits can be a bit confusing, but understanding the types can help you make a more informed decision. There are two main types of stock splits: forward splits and reverse splits.

A forward stock split tends to occur when a company's stock price is high and the company wants to make the stock more affordable for investors. This type of split is less common than reverse splits.

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Reverse splits, on the other hand, are more common and tend to occur with small companies that believe their stock price is too low to attract investors. Companies might also do reverse splits to maintain their listing on a stock market that has a minimum per-share price.

In a reverse split, investors receive one share for every 200 shares they own, which can result in a post-split share price that is many times the price of the stock's current price.

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Stock splits happen to make a stock more attractive to investors, increasing its marketability and liquidity.

Companies with high stock prices, like Amazon, can split their shares to make them more affordable for everyday investors.

The goal is to make the stock more appealing to a wider audience, not to change the company's value or performance.

In fact, the value of a company's stock remains the same after a split, but the number of shares increases.

For example, if Amazon's stock price is $1,000 and it splits 2-for-1, the new price will be $500, but the total value of the company remains $1,000.

Companies may also split their stock to reward shareholders with more shares, rather than paying out dividends.

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