V.10:7 (320-322): Stock Splits: Boon Or Bust? by Michael D. Sheimo

V.10:7 (320-322): Stock Splits: Boon Or Bust? by Michael D. Sheimo
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Stock Splits: Boon Or Bust? by Michael D. Sheimo

Even the most sophisticated market participants are tempted to buy a stock that has been announced to split two for one. They, of all investors, should know better, because not all stock splits turn out to be positive events. So how often are they positive for three to six months after? Michael Sheimo, best known for books such as Dow Theory Redux and Stock Market Rules, explores the question.

Say that XYZ Corp. has just announced a two-for-one stock split to take effect in two months. Is it time to sell what you hold, buy more or do nothing? How do stock splits generally effect the price movement of individual stocks? What reasonably sound decisions can be based solely on the announcement of a stock split?

As investors we tend to be more buyers than sellers. This leads to the buying bias of the stock market. The fact is that most of the time we want to buy stock and are hesitant to sell; as buyers we often look for any possible excuse to buy. The excuse might be general say, a Santa Claus rally or it might be more specific, such as a company that has just announced a two-for-one stock split. That a stock will split is a drawing point, as stockbrokers are aware, and they will often mention the number of times a stock has split in the past five years.

Although the number of splits in the past five years can provide a useful historical reference, the split information by itself isn't much of a recommendation.

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