Stock splits

Sometimes when the price for a stock reaches a high level, a company announces that it's paying a stock dividend or splitting the shares in two. The timeline for a stock split is very similar to that of a dividend, and split information is sometimes included on charts. A company will announce a split, which is usually considered a positive event for the stock. The announcement indicates what type of split it is (2 for 1, 3 for 1, and so on) and the date that the split will be effective.

That date is the day that shareholders own more shares at a lower price, and it's the date that's noted on a chart, typically with a big letter S or a note about the type of split.

So how does splitting work for you? If you own 10 shares of that stock, you own 20 on the split date. The price of the stock is usually adjusted accordingly. For example, if a stock is trading at $100, and the stock splits so each share held becomes two shares, that's considered a 2 for 1 split, and the price of each new share is then $50. The dollar amount is the same, but the number of shares is increased.

Splitting shares allows for more broad ownership of a stock. Many people can afford to buy 100 shares of a stock that trades for $15 a share ($1,500); few people can afford 100 shares of a stock that trades for $200 a share ($20,000). The idea is that the more broad the ownership, the better the performance of shares.

Stock split information on a chart is useful when a company's stock has had recurring reactions to stock splits. Generally, a stock rallies after the news of a split, although whether this fact is logical is debatable, because a stock split doesn't necessarily mean that something has fundamentally changed within the company. Unfortunately, the announcement of a split isn't common

(g on a chart. But since the date the split is effective is generally available, you can easily focus on how the stock trades leading up to the split and afterward, and make appropriate trading decisions.

Insider trading: the legal kind

Legal insider trading — not the kind of insider trading that results in executives wearing handcuffs on the evening news — is the trading activity of company executives in their company's stock. In this context, an insider is anyone officially associated with a company, or even an owner of 10 percent or more of a company's stock.

The option to buy stock can be a major part of the compensation package for employees of public companies. From the company's standpoint, it makes sense to offer employees another incentive to work hard for the financial well-being of the company and the strength of its stock. Employees of a company may also buy stock in the open market when they believe the company's prospects are bright.

Owners of 10 percent or more of stock may have access to some information that you may not have. You can't blame them if they make decisions on buying or selling that stock based on their insider information. However, by law they must report this trading activity within a few days of making such transactions, and the resultant data is public and sometimes ends up on charts!

On the flip side, at times, employees who own shares may choose to sell. It's a bit tricky, as the stock may be sold for personal reasons — a major purchase like a home or child's college education, for example — or it can be a signal that an employee believes a stock's price has reached a level where it's prudent to sell shares. In this case, following an insider's lead and selling that stock may prove profitable or help you avoid a loss.

To see what insider trading information looks like on a chart, take a gander at Figure 3-8.

When insider trading information is included on candlestick charts, the indications of insider activity are usually very easy to read. In Figure 3-8, the B indicates insider buying, and the S indicates insider selling. (Splits also use the S. But splits normally have a 2 for 1 or some numbers along with the split. It really varies from chart service to chart service.) Some other charts use up arrows to indicate buying and down arrows to indicate selling. This chart includes buying in September and selling in October. It appears the insiders in this company do a very good job of trading their own stock!

Trying to trade along with insiders has such a following that not only does insider trading information appear on some charts, but also services and newsletters are devoted to disseminating the information. One service, InsiderScore, even ranks individual insiders by how well they have bought and sold shares in the past!

Figure 3-8:

Insider trading 74 activity included on a candle- 72

Figure 3-8:

Insider trading 74 activity included on a candle- 72

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Do an Internet search for Insider Trading Newsletter, and you'll get more results than you'd know what to do with.

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