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 their account and see their position is down 50% while their number of shares have increased by twice the amount. Essentially 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 their stock more affordable to the masses. The average investor would 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 their positions? Could it be dumb money selling because they are in a panic to see their 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 messy 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 enter long through the new breakout level.
Below is another prime example of why we run for the hills in the short term with a stock split, ever heard of that company called Apple?
Apple prior to its 7-1 split was a scary stock to trade. There could have a $1 plus spread off the open meaning the bid could be $600 and the ask could be $601 just to get in, the difference in your investment was around $100 per hundred shares. In comparison, most stocks have around a $.01 spread; a mere $1 difference. Apple wanted to bring in more dumb money so to speak since the only people who would trade Apple were professional traders and big funds, while the average investor is only able to afford a few shares.
At this time, Apple was on an amazing run going from under $500 to over $650 in a very short space of time, the day the stock split took effect was the short term top in the stock. As we all know Apple is higher today that it was a year prior when it split the stock, but we don't want to be long a stock when it just put in a short term top and is looking to pull back over the next week or two. Which is exactly what Apple did from $95 down to $90 or $650 back down to around $600 pre split.
As a short term swing trader, we want the most profitable swing trades, we don't need to get caught in a pull back after a stock split. We will leave that to the pros ;)
Do you have balls?
Your task today is to post the current prices of AAPL, BRK.B, and UA if their shares were not split.
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