jho's answer is technically correct. Splitting a stock is like splitting a quarter into two dimes and a nickel. There is a lot of theory about the motives behind a stock split, and whether a split, or more correctly, a rumor of a split can help the price of the stock. One common belief is that the board of directors will only vote a stock split if they believe that the share price will rise in the near future. If only it were that easy...
Hmmm .... what if im holding a short position thru the split date. Do i get bought in somehow or am i now short the shs due to the split?? ... rj
If you are short, the change is nominal, just as if you are long. For example, if you are short 100 shares worth $8.00 when the stock splits 2/1, now you are short 200 worth $4.00. Flip side if you are long.
Now that was one of the more astute comments I have read here in a long time! Why would LONG or SHORT differ during a stock split? The price is cut in half and position size doubled, the opposite is true on a reverse split. Maybe you could explain the effect of strike price on options during a split for us next.
"Why would LONG or SHORT differ during a stock split?" ----------------------------------------------------------------------- Here's why. In the long case, of course, one is in possession of the shares in a brokerage acct. The transaction is complete and there is no further obligation on the customer's part with respect to this particular transaction. Let's say we want to go short 100 shs before a 2:1 split date. sombody(or broker inventory) lends 100 shs to customer and the customer sells them. Now, neither the customer nor the lender is in possession of those 100 shs. Two items remain. The lender is in possession of a promise given by the customer to return those 100 shs. And, the customer now has the cash proceeds from the 100 shs sold. This transaction is not complete until the 100 shs are returned to the lender- unlike the long case. After the split date, clearly, the lender is not going to take 100 post split shs per the original agreement. Depending on the structure of the lending agreement, before the split date lender could just re-call the 100 shs- customer gets bought in, recall takes place with broker re-borrowing 200shs, or some sort of accounting magic leads to customer holding 200 shs short. Im with IB and here is the relevant section of their brokerage agreement. ... rj ....................................... Customer is responsible for the accurate designation of an order as a short sale at the time the order is placed. Customer acknowledges that: (a) short sales may only be effected in a margin account and are subject to the initial and maintenance margin requirements set forth above; (b) prior to effecting a short sale for Customer, IB must be able to borrow such stock on Customer's behalf to effect delivery of such stock to the purchaser; (c) if IB is able to borrow stock to enable Customer to effect a short sale and the lender subsequently issues a re-call notice for such stock, IB will attempt to re-borrow the stock on Customer's behalf, it being expressly understood by Customer that if IB is unable to re-borrow such stock, then IB, without notice to Customer, is authorized by Customer to cover Customer's short position by purchasing stock on the open market at the then-current market price and Customer shall be liable for any resulting losses and all associated costs incurred by IB. As noted above, the market value of short stock is treated as a debit item to Customer's IB margin account.
the stock usually goes up the 2 days before the stock split and then the day the stock splits, the people take their profits from it going up and then the stocks goes down because there is twice as many shares(on a 2:1 split) and the stock is watered down stock. It usually will go down the day after the split. And it usually hardly never goes back up. Hard to trade stock splits and make a profit unless somebody has very fast fingers and can get in and out within seconds of making a few points. Have to be fast though. You need a fast trading platform and a level 2 screen. Lots of people that have been trading for 20 years stay away from stock splits because the daytraders are the ones that are making it move and it is easy to lose money. Microsoft is an example of a watered down stock. Too many shares are out. Too many stock splits. Lots of people trade it, but it doesn't move. It usually moves up when he announces a stock split but then it goes back down after the split.
Looking beyond a daytrade, most splits are generally positive for the medium to long-term outlook for a stock. Take a look at any stock that has split ~2-3 times over the past few years and the point will be clear enough.