Many traders wonder whether they should buy stocks before or after a split, and we’ll explore that question and provide guidance on how to trade stock splits. 

What is a stock split, and why do companies perform them? 

A stock split is a corporate action in which a company divides its existing shares into multiple shares. It typically occurs when the stock price has risen significantly, and the company wants to make it more affordable for retail investors to buy shares. For example, if a company’s stock trades at $1,000 per share and splits 2-for-1, the new shareholders will own two shares worth $500 each. 

Stock splits are usually performed by companies with solid fundamentals that are increasing. The goal of a stock split is to make the shares more accessible to a broader range of investors and increase liquidity. 

When should you buy a stock split? 

If you’re a long-term investor, there’s no need to rush into buying a stock that has just announced a split. It’s better to wait until the split takes place to get a better price. After a stock split, the share price will usually drop by a small amount. 

However, if you’re a day trader or swing trader, you might want to buy a stock before it announces a split. That’s because the share price typically rises in the days leading up to the announcement as investors anticipate the event. 

The benefits of buying stocks before a split occur 

The main benefit of buying stocks before a split is that you might be able to get a better price. If a stock trades at $1,000 per share and splits 2-for-1, the new shareholders will own two shares worth $500 each. 

Another benefit of buying stocks before a split is getting more shares. If you own 100 shares of a stock that splits 2-for-1, you’ll own 200 shares after the split. It can be beneficial if the stock price rises after the split. 

However, there’s no guarantee that the stock price will drop after the split. In some cases, the share price might continue to rise. For example, if a company announces a 2-for-1 stock split and the stock is trading at $1,000 per share, it could rise to $1,200 or more. 

The benefits of buying stocks after a split occur 

The main benefit of buying stocks after a split is that you might be able to get a better price. If a stock trades at $1,000 per share and splits 2-for-1, the new shareholders will own two shares worth $500 each. 

Another benefit of buying stocks after a split is that the shares are usually more liquid, and that’s because there are more shares available for trading after the split. It can be beneficial if you want to sell your shares. 

How to know when a stock split is going to happen 

There are a few ways to know when a stock split will happen. One way is to look for news articles that mention the possibility of a split. Another way is to look for rumours on message boards or social media. 

If you see news articles or rumours about a potential stock split, you should do your research to confirm that the information is accurate. The best way to do this is to look for an official announcement from the company. You can also keep an eye on the stock price. If the share price rises rapidly and hits a new 52-week high, the company may announce a split. 

When to sell your shares after a stock split 

If you’re a long-term investor, you might want to hold onto your shares after the stock split. That’s because the company’s fundamentals are usually the same after a split. However, if you’re a day trader or swing trader, you might want to sell your shares after the split. That’s because the share price will usually drop by a small amount. 

You can always set a stop-loss order if you’re unsure when to sell your shares. This order automatically sells your shares when they fall to a specific price. You can also set a target price, which is the price at which you want to sell your shares. Once the share price hits your target, you can sell your shares and take profits.