Many different stock trading methods are used effectively in the marketplace. The first step towards making money with any one of them is to understand the reasoning beneath the strategy. Once you comprehend the underlying trading logic, you can move on to drafting a plan to enter and manage the trade successfully.
Stock Splits rank at the top of our "preferred trading" list. This is despite the fact most financial writers still think stock splits have no real value. They believe that stock splits are nothing more than a numerical event - two nickels for a dime.
While this is technically true from a mathematical point of view, trading stock splits isn't just about arithmetic. Most investors base their decisions on emotions, not hard data. In the real world math is just one reason people buy stocks.
As an overwhelming rule, stock splits have a positive emotional affect on current shareholders and potential investors. Any stock split announcement gives cause for celebration, as corporate management generally present the news in the most upbeat tone possible. This is relatively easy to do because a dramatic increase in the stock price is the primary reason most companies declare a stock split in the first place.
Splits are a near perfect way to generate enthusiasm by advertising investor success. While lowering the price with a split provides affordability for new investors, current shareholders enjoy the pleasure of watching the number of shares they own double or triple overnight.
Again, the positive perception of splits tends to fuel investor emotions. Fortunately the mathematical results found in the performance statistics of stock splits are also very favorable.
Companies that split repeatedly have a lot in common with each other. They are profitable businesses, they are among the leaders in their sectors, and they have a knack for catching the attention of investors. These stocks go up, they split, go up some more, and then split again. This winning cycle repeats itself over and over.
Bottom Line: Though a stock split in and of itself may not increase the dollar value of a stock, the positive publicity surrounding these companies does attract new investment dollars. The increased demand drives prices higher, creating an exciting emotional environment that appeals to even more buyers.
Traders who are familiar with the split phenomenon also buy shares at specific times based on the different stages we've defined over the years. RightLine has been fortunate to help develop several popular split-trading methods that take advantage of opportunities first exposed by pioneers such as Julian Salas many years ago.
Julian's early research in the field led to the six phases of a stock split which we currently use at RightLine. Long time readers will remember a time when our report was called The Right Line Split Report. Though we've since changed the name slightly, we still include the detailed information needed to trade splits successfully. We provide it because stock splits are positive events that work well for traders. They deliver results, and we believe they will continue to do so for a long, long time.