Baidu, Inc. (NASDAQ:BIDU) jumped today, soaring to $77.05 +5.63 (7.89%) after splitting 10 for 1. Why do stocks usually jump after they split? Often times there is a key psychological factor at work. A stock like Baidu was over $700 prior to the split. Many retail investors will never go buy a stock at this price because it just seems so expensive. When you take out the retail investor, you are removing buyers that would otherwise buy the stock. That is why companies like to split their stock. It simply makes it more appealing to the public. Public buyers cause a further increase in stock price.
When a stock like Baidu splits 10 for 1, it becomes cheap even if dollars for a retail investor to buy. Now the funny thing is, technically the stock is valued at the same amount in market cap regardless of a split or not. For instance, if you had bought 10 shares at $700, it is now the same thing as buying 100 shares at $70. Psychologically, retail, small investors do not feel that way. They want to at least buy 100 shares. Those even number lots are key.
Either way, a stock split makes it cheaper for the retail investor and will usually cause a jump in the price of the stock following the split. This jump can last for a few days to a week or two but usually involves the institutions selling into the smaller investors. The stock usually will top out for a while after this surge.
Another stock recently to see this phenomenon was Berkshire Hathaway Inc. (NYSE:BRK.B). The same price run jumped the stock into the split and right after. However, since the retail investor jumped in and pushed it up, the stock has slowly fallen back. Be aware of this psychological phenomenon. Do not chase and fall into the retail investors mode of buying the tops. Learn the game and profit.
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
