Combining Stock Splits And Momentum Investing
Stock splits are considered to show strength in a stock and be an indicator of the future price movements of the stock. The theory says that stocks that split occur because their stock has increased so rapidly that they need to lower their price in order for the average investor to be able to invest into it.
This means that the company should be a pretty strong company and the same momentum that carried them up to that high level before the split will likely push them back up to that level after the split.
It is a good theory and seems to work when you look at historical stock splits and their effects, but even so it is just one thing to look at. Just because a stock split does not mean it is something that you should start buying with both hands, if it was then every company would start to split their stock in order to get all these crazy investors to jump on board.
It is still important to factor in other things to determine whether the stock really is a good investment or not. One of bigest indicators to look at is how the stock has actually performed in the past.
In momentum investing a trader attempts to get into stocks that are going up and hold onto them for as long as those stocks continues to go up. How does that work its way into stock splits?
Well one thing that I have done is to keep a list of stocks that have just split, especially strong stocks. Then I’ll watch the stock to see if they give ma a buy signal and they look like they are going to start making a big upward move.
If it does then it has the potential to be a very profitable trade. Also the fact that the stock has just got done splitting may also give the stock an extra boost of momentum.
Stock market splits can work out great, but they work better when combined with better investment strategies. That way all the odds can be put in your favor which is always a good thing.
