How to Trade Stock Splits
A stock split increases the number of shares outstanding, which decreases the market price per share such that the before and after market capitalization of the company remains the same.
Example:
JKL Company splits its stock 2-for-1. Peter holds 1,000 shares before the split and each share priced at $20. So, Peter has $20,000 worth of stocks (1,000 * $20).
After the split, Peter will own 2,000 shares, the new price of the stocks on the market will be adjusted to $10 per share, and again, Peter has $20,000 worth of stocks (2,000 * $10), which is the same as before.
How to trade stock splits? There are many sources that will provide you with the list of future stock splits and related information, such as the Yahoo! Finance's stock-split calendar. There are such splits as 2-for-1, 3-for-1 or 3-for-2. You have to do some research and keep an eye on these stocks. It is advisable to purchase stocks before the split is executed in case you pay the broker according to the number of shares bought.
