Why Stock Splits Can Be Messy

UA was a stock we had on our radar for a breakout through $85 over the last week or two, but when UA split its stock 2 for 1 we took it off our radar and here is why.

Most dumb money investors (people who are unaware of what is going on) will log into there account and see there position is down 50% while there number of shares have increased by twice the amount. Essential nothing has changed in value

Ex.

The day prior an investor had 100 shares at $84.00

The day of the split an investor now has 200 shares at $42.00

Still the same value, but technically the stock is down 50% going from $84 to $42 overnight

Nothing has really changed, companies do this in most cases to make there stock more affordable for the masses. The average investor rather have more shares of a cheaper priced stock than less shares of a more expensive stock. Hence the reason why most new investors love penny stocks.

Usually what happens in the day or week following is a short term sell off. Could it be smart money or institutional  investors getting out of there positions? Could it be dumb money selling because they are in a panic to see there position down 50% when really nothing has changed?

No one knows for certain, what we do know is that it is usually a tad bit messing for the days to come, and also the stock split more or less marks a short term top in the stock. Given that we only want to trade the best stocks, UA will no longer be on our radar for a position to entry long through the new breakout level.

 


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