A stock split is an event whereby the company management and shareholders decide to split the stocks or shares, usually at higher prices. This may be another form of dividend to the shareholders as usually stock splits often results in price increase.

The splitting or dividing of the stock will cause the stock to be proportionally divided to equal sizes. Depending on the split divisions, most of the companies split on 2:1 or 3:1 with others going for 3:2 or 5:1 and different combinations.

What this means is simply splitting stocks at different divisions. For example, a 2:1 (two for one) split means the company is dividing the stock from 1 to 2 units. Shareholders that have 100 units of stocks will automatically own 200 units after the split.

So, how do we make money from stock splits?

Looking back at splits that have occured in the past, we may noticed that the stock price will gradually increased before the record date and until the split date.

This is expected due to the shareholders would want to hold on to their stocks to entitled for the splits. Also there will be more buyers as they want to ride on the stock split as well, followed by some breaking news that increases the stock price will eventually push the stock price higher and higher.

How to find stocks that are splitting?

Easiest way is to search for news on stock split. One of my favorite is Google News – news on stock splits. There are numerous websites that offers stock split calendars too.

Once you find some stocks announcing their splits, there will be 2 important dates to note – record date and split date.

The record date refers to the date of shareholders that are entitled for the split and split date is the actual date of the split. You may want to do some research on your own to see whether this is a hot stock or not – looking at the volume of trading and perform a comparison with a few others will give you some insights and clues.

Usually you buy a call option or the stock itself to take advantage of a stock split – buying one day ahead before the record date will see higher profits.

Hope you find this article useful and happy trading!

Do let me know how you are doing with stock splits by posting a comment below.

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