Is it a good idea to short a stock on the split-up date ?

Question

I shorted PCU on 3rd of October and realized that this stock split up on the same day (2:1), what are the impacts on my investing? I will appreciate your response and look forward to meeting friends on line who are interested in stock trading. :)

Answer 1

Any impact a split would have on your investment would be psychological only. A split does not at all change the valuation of a company (if anything, it hurts the valuation due to the costs incurred in registering and executing the split) as the price should change according to the split ratio.

A split does, however, make a stock's price more attractive to investors. Buying Berkshire-Hathaway at 97,400.00 is a lot more cost prohibitive than buy Microsoft at 27.85, though MS's market cap is about 75% higher than B-H.

Thus, a split is often a means to attract individual investors to a company, and the merits of this are debatable. Institutional investors (investment banks, hedge funds, etc.) aren't going to care what the price of a stock is, they only care about the valuation and expected returns. Institutional investment is also a popular means of determining a floor (or "support") of a stock. If a company has a certain level of institutional support, any investor can feel confident that the stock will hold at a certain level.

Individual investors tend to be emotional, which is why the share price is more important, but they often tend to be less informed or aware of the fundamentals and numbers than institutions (as well as simply having less access to information). In this light, a split can be either 1) a [cheap] means of raising capital in that the firm has no other better means to do so (which is a bad sign) or 2) an additional means of raising capital for profitable projects by allowing greater access to individual investors (a good sign).

Overall, I feel that case #1 tends to happen more often because if a company's going to make big bucks money will find its way to the company, regardless. However, the impact, if any, should be financially negligible and the changes should be psychological only. Maybe you could trade on the psychology.

Answer 2

Most people believe that a stock split is a positive signal that a firm believes that it will continue to perform well. Stocks usually split after there has been a run-up in price. One idea behind this view is that lower priced shares are more affordable to investors -- so it keeps the stocks liquid.

On average, there is a positive effect on stock price when the split is announced. This is an announcement effect only, as research shows that stock splits have little effect on the post-split returns. This means that the expected return for stocks that split is the same as if they do not split. There is no advantage to shorting stocks that split.

Answer 3

I dont think there are any 'must do' rules in stock trading. I've never been able to simply 'do this, when this happens' and make money. You will have twice as many stocks at half the price. For all intents and purposes, it doesnt impact you at all.

Did you short to 42.50? It looks ok if you dont want the position. They do have a nice dividend though.

I'm not much of an experienced trader, but link up to me so we can trade ideas.

Answer 4

it depends upon the market condition and future outlook of the particular stock.

Answer 5

u could say like, even even with the actuality that bob and amy..... yet.....thats the way it contains be.... even as.... skill fill in with the e book. there develop into some regulations alongside the way it might want to correctly be