Several high-profile companies have enacted stock splits in recent years, such as Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOG, GOOGL). While a stock split does not change anything fundamentally about a company, it usually conveys that a company is financially healthy. As a result of a stock split, the number of shares outstanding increases as well.
In addition, stock splits also make shares more accessible for retail investors due to a lower price. Options contracts become cheaper to trade as well, further increasing accessibility.
Regarding the upcoming TSLA 3-for-1 stock split, eToro analyst Callie Cox explained:
Owning the whole share can be less complicated and more empowering, and these companies know that […] There’s clearly an underlying desire in this market for any company to make its stock as accessible as possible. And so far, investors have responded to that.
So, is it better to buy before or after a stock split?
Should You Buy Before or After a Stock Split?
Generally, the price of a stock moves higher following the announcement of a stock split. In a perfect world, investors could take advantage of this, but unfortunately, trading on knowledge of a stock split prior to its public disclosure is classified as insider trading.
Furthermore, stock splits are usually announced a few months before they actually occur. As a result, any appreciation in price is factored into the stock price by the time the split happens.
If the widely debated Efficient Market Hypothesis (EMH) holds true, then trading on stock splits will not provide alpha. The EMH argues that current prices reflect all available information. As a result, consistent alpha generation is impossible.
Ultimately, investors should invest in companies that they believe have excellent growth potential. While stock splits are generally seen as a positive, they should not be the centerfold of an investment decision. At the end of the day, trading based on stock splits does not seem to be a viable investment strategy.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.