Should I buy a stock before or after a split?

Before I begin I suppose I should define what exactly a stock split is. It's when a company divides its existing shares into multiple shares. The number of existing shares increases but the overall value of the shares remains the same. If a $100 stock does a 5 to 1 split then for each share of the stock that you own before the split will then become 5 shares and the value of each share will be reduced in an equivalent manner, thus the new value of these shares becomes $20.

Sam Flores
Mural by Sam Flores
Last week one of the stocks I own, Visa (V) did a 4 for 1 split. While my overall investment remains financially the same, I was wondering if it would have made sense to add to my position before or after the split.

There are a few reasons a company typically does a stock split, the first is that it provides more liquidity since more shares will be traded. This will also lower the spread between the bid and ask prices of a stock. Another reason is a psychological barrier for smaller investors, some investors may shy away from expensive stocks simply because of the price of them. I know that there are a few socks I never plan on owning simply because of the price. For example Berkshire Hathaway Class A shares cost about $218,000 per share right now.... So unless the company decides to do a 218 to 1 split sometime soon I sort of doubt I will ever be a buyer.

Psychological Barriers

On a smaller example I even have a hard time investing in a company like Google for similar reasons, right now their stock is hovering around $580 per share, if I have $1000 to invest then that means I can only buy 1 share because I can't buy fractions of shares. (I realize some brokers may have ways to buy fractions of shares but that's not the point here.) Normally, if I am investing my money I don't want to get killed with more transaction fees than I have to, so I don't want half of the money I'm trying to invest to have to sit on the sidelines because the shares cost a lot. So that's a reason that I sometimes won't invest in a particular stock.

So in some cases waiting for a split might mean instead of buying a company like Apple at $700 per share and having a large amount of money sitting on the side after. Or waiting to buy after a split when it's $75 per share would mean that I can invest more of my capital in the same transaction.

Sometimes investors don't pay attention to the markets very much. I know a lot of people don't pay attention to stock prices like I do so if they have ignored Apple stock for a year then might not realize a split happened and just think that this is a "dip" in price to buy on. I know I have overheard Apple "fanboys" talk about this and I can only think that they only pay attention to the trends they care about, not investing as a whole.

I've also researched people's thoughts on buying before and after a split, some say there's a rise before and a fall after. And others say that there's a rise after the split... Either way no one has been able to provide concrete evidence so I honestly don't believe any of them.

What I do know

Short term - anything can happen, both before and after a split, so who knows! BUT, I do know that splits generally a response to good performance. I mean, if a company's stock is growing to the point that they feel it would be helpful to bring it back down to a level that average investors will be more likely to buy - then that's a good thing! The company's stock was rising to begin with so they want to keep the momentum going. I don't know if buying before or after a split is better, but I believe that long term you are looking at a solid investment so who cares about the day to day fluctuations that happen anyways.

Also, another thing to notice is that the title of the article already notes that I'm already psychologically interested in buying the investment, it's just a matter of when. It wasn't named "buy or sell before a stock split" for a reason.

Next up for me is Starbucks, this is another stock I own that just announced a split that will take place in just a few weeks.

In full disclosure, in case you didn't read the article, I am long on both V and SBUX. I also do not intend to add to my position in either of those holdings at this time. But that's mostly because I already have a significant position in both of them.

8 comments:

  1. It's all psychological. At the end of the day, you still have the same ownership in the company, whether you own 1 share at $100 or 2 at $50. But we like the lower price as we feel we are getting a deal. But you really aren't, it just looks that way on the surface.

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    1. Jon,

      In my head I understand that I'm buying the same thing at either price, just in smaller or larger increments of it. But for me it's a decision on what do I think the masses will do. It's a psychological decision on how I feel like other people will react to the split. There is only one real valid reason why I think it can fluctuate and that's liquidity. If it's cheaper and more volume comes in because of that then that's usually a good thing.

      -Zee

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  2. This is an interesting topic. I've never really given it much thought, but I have to admit that when I read the title, I immediately thought "I would buy before the split." Not that I know anything about the technical trends of such things, but my general feeling is that stocks tend to rise after a split. Of course, I would never trade based on a general feeling, but it's an interesting question to consider. I think your comment about a company 'needing' to split is spot on, though. Generally it should mean that things have been going well for the stock, and they anticipate that things will continue to do well.

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    1. Bearded Dragon,

      I think that if you're looking long term then splits are generally a good sign for the company so it probably won't matter when you buy. But it really is a weird financial event that does throw a little chaos into the mix every once in a while.

      -Zee

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  3. Zee,
    Personally I was a little confused when this happened to Apple's stock, so thanks for clearing that up. For Apple, when it split it went to about $95 a share and is currently at $124 as I type this. Honestly I am really bad about keeping up my portfolio. Occasionally I will read something that will get me interested in a company thinking I got some kind of insiders tip, but honestly I did better when I was paying attention to stocks in a H.S. class and picked my stocks based on things like my boyfriend's name at the time or a company that I thought would rise because of things like Christmas, etc. While my portfolio is currently pretty diverse, again, I don't pay much attention to it. Most of my stock is in Apple, so I tend to watch that one the most. The only time those stocks are sold is when I want to make a big purchase like an international trip or something so really I just sit and watch it grow. But back onto the article. It now has me thinking more about keeping track of companies who are aiming for a split.

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    1. Rags2Riches,

      Actually apparently there's an investment advisory firm called "2 for 1" which has a portfolio that only has stocks that recently split and they hold them for 30 months. Here's a link to that article where I found that information:

      http://www.wsj.com/articles/SB10001424127887323336104578501533467087720

      take it with a grain of salt though, one of the people recommends only buying stocks that split who have other good technicals... In which case they are using more than just the fact that there is a split in their decision making process.

      -Zee

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  4. Zee,

    Interesting topic!

    Personally I don't really have a preference for buying before or after a stock's split. The only tangible advantage is that a stock split could bring prices of a single share down to the point I can invest most of my available cash (i.e. the Google example).

    In the long-run I don't think it matters if you purchase before or after the split. The difference in price will be insignificant in thirty to forty years' time.

    Cheers,
    NMW

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    1. NMW,

      So long as a stock has not spiked (or dipped) recently before or after a split I really don't think it matters either. Like you said, if you're holding it for 30-40 years then who cares. But you just have to make sure you picked a strong company that will still be around in 30-40 years.

      -Zee

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