Few headlines grab investors' attention like news of a stock split from a massively successful company. There's often a tremendous amount of movement in stock price around the split date, even though stock splits have no direct effect on the value of shareholders' interest in the company.
As investors, we need to know the best ways to capitalize on moves like this -- and what common pitfalls await those who move too quickly with little information. It's critical to not get caught up in the mania, but to rather practice patience and make smart decisions to reap significant gains.
Tesla (TSLA -1.92%) is one company preparing for a stock split that also went through another split fairly recently. Let's take a look at how that previous split panned out to help determine the optimal time to buy during this go around.
Image source: Getty Images.
Increased volatility
Tesla last split its stock less than two years ago and it wasn't alone in doing so. Apple (AAPL -1.22%) also conducted a split around the same time in 2020 and, as another popular and successful company, offers a relevant point of comparison for investors. As we can see in the below chart, there was an enormous amount of movement around both splits, with Tesla being the more volatile.
Increased volatility can create problems for potential investors, but those who are prepared for it can avoid making money-losing knee-jerk trades. Long-term investors would be wise to have a specific buying range in mind and focus on their long-term goals while the short-term trading is erratic.
Three data points to watch
There are three major points in the timeline of any split: the announcement date, the split date, and the stock's near-term low point once the split has been completed. The chart below illustrates how Apple and Tesla's stock prices reacted at these intervals around the time of each company's 2020 stock split.
Data source: YCharts. Chart by author.
Both stocks made significant gains in the lead-up to the split, and both settled back toward the announcement date's price shortly thereafter. Apple's post-split low, which came 14 trading days after the split, while Tesla's took just six.
Those who didn't buy or add to their Apple holding ahead of the split date could have done so at nearly the same price as the stock's announce-date close. The same pattern is seen in Tesla stock: investors were much better off waiting to add shares until after the split and its accompanying hype.
Good timing is profitable
It's no secret that a well-timed trade makes a substantial difference in an investor's future profits. Patient buyers were able to triple their Tesla investment since the post-split low on Sept. 8, 2020. Meanwhile, those who bought during the excitement of the split date have had to settle for a double. Results for Apple stockholders are similar.
Data source: YCharts. Chart by author.
None of this data guarantees the same pattern for upcoming splits, but the correlation indicates a possible trend. With heavyweights Amazon (AMZN -2.56%) and Alphabet (GOOG -1.10%) (GOOGL -1.23%) set to split this summer, and Shopify (SHOP 0.23%) in talks to soon do the same, the question of how best to profit from these splits is even more topical.
The bottom line: In a perfect world the best time to buy is before or on the announcement date. However, if we miss that trade, it pays to wait patiently until after the split to buy or add to your holdings.
