- Put these stocks on split watch — the momentum could be incredible (buy only if you’re ready)…
- Find out what to expect if one of your top watches announces a split…
- What does a stock split mean for the company’s value? Read on to learn this now.
To consistently profit in the stock market, you have to recognize opportunities. I’m talking about patterns that repeat. And it’s knowing which catalysts move stocks.
One catalyst for a spike is a stock split.
Keep reading to understand why a stock split might lead to big spikes. I’ll also give you 3 top stocks to watch for splits in 2022.
Table of Contents
What’s a Stock Split?
As a company and its market cap expand, its underlying stock’s share price grows with it.
That’s fine until a share price becomes overly expensive, usually around $1,000 per share.
When shares cost this much, the high price can serve as a barrier to entry. It dissuades potential investors and traders from buying the stock.
Think about how many retail traders have accounts with a total value between $1,000 and $5,000 … How will they reasonably invest in, say, Amazon? They can only buy a single share.
This is where a stock split could come into play…
There’s a psychological component to share prices. Traders and investors are more likely to buy a stock trading for $500 than a stock trading for $2,500 — even if the market caps are exactly the same.
This is why a company may choose to split its stock. In other words, it divides its share price while granting shareholders more shares.
But how does this work in real life?
Let’s say last week you owned 100 shares of Stock XYZ at a share price of $1,000. After a 4-to-1 stock split, you’d own 400 shares of XYZ at a share price of $250.
Your actual equity position didn’t change, but the share price is now divided by four.
Stock splits allow traders with smaller accounts to start positions in large companies without needing to resort to purchasing fractional shares.
So without further ado, let’s take a look at 3 expensive stocks that could split in 2022.
Tesla, Inc. (NASDAQ: TSLA)
Tesla has split its stock before. That’s a good sign.
In the stock market, history often repeats. Past spikers can spike again, and past splitters can split again.
It’s important to make note of companies that take advantage of this psychological catalyst.
As of January 12, 2022, the price is $1,100. Think about what I wrote earlier about key dollar levels. Many retail traders have small accounts — maybe just a few thousand dollars.
And while starting small is great for day trading, it’s hard to buy expensive shares.
Tesla is leading the EV sector. And Elon keeps his company center stage.
Considering the history of splits and the current share price, it wouldn’t surprise me to see another one in 2022.
Johnson & Johnson (NYSE: JNJ)
This is an interesting case. Johnson & Johnson announced a split in the company. This will result in two separate publicly traded companies.
It’s not supposed to happen for a while, but keep it on your watchlist so you’re prepared. Don’t just stuff this knowledge back in the depths of your mind.
Write this down and get ready!
There’s something really important to understand about day trading these…
Don’t hold through the split.
It’s a ‘buy the rumor, sell the news’ kind of situation. You don’t know what will happen when the shares split. So don’t wait around to find out.
My best advice is to aim to trade the momentum before and after the split. Wait for the stock to pick a direction. Be ready to cut losses if you’re wrong.
Apple Inc. (NASDAQ: AAPL)
This company has split five times since first publicly trading in 1980. I’ve always got my eye on Apple for a potential split. And I’m a hardcore Apple fanboy. I admit it. This ticker regularly makes my monthly watchlist.
It’s still one of the hottest stocks today. Look at the chart.
The share price is approaching $200. I’m not saying it’ll definitely get there. But that’s another big psychological number.
Now, be honest … How many shares of AAPL could you buy right now? My guess is not a lot.
It’s too expensive for a lot of people to trade. But a split would lower the price and open the door for traders with small accounts.
It’s got a history, and the price could be right.
The Bottom Line: Why Traders Should Watch for Stock Splits
You might wonder if the market cap doesn’t change in a stock split, why would traders care?
The effect’s mostly psychological.
Think about dollar stores … They’re successful because shoppers can’t resist a (seemingly) good deal. These stores sell nearly identical products to their grocery store counterparts for much cheaper.
This psychology works the same with stocks too.
Traders sometimes treat the stock market like it’s a dollar store, particularly when it comes to stock splits. They may rush out to buy XYZ at $25 when they felt it was too expensive at $100.
But they’re buying the same thing.
Trading around recent stock splits has followed similar patterns. Arista Networks Inc. (NYSE: ANET), Intuitive Surgical Inc. (NASDAQ: ISRG), and InMode Ltd. (NASDAQ: INMD) all ran after split announcements.
But all three proved to be ‘sell the news’ events as traders sold their shares on the actual day of the splits.
This is why knowing your history is important. If you know what to look for, stock splits can present incredible trading setups.
Comment below the stocks you think might split in 2022. Go through my criteria and make a case for each one!