Unless you are psychic, it's usually impossible to systematically buy low and sell high. However, there are a few unusual circumstances which favor buying a stock at a lower price and selling it at a higher price. Announcements of stock splits, divestitures, and cash-for-stock takeovers provide forewarning about the possibility of future price increases for a stock. These are event-driven trading strategies whose time frames afford the opportunity to buy at a lower price before the event and to sell at a higher price after the event.
Scan the financial media for announcements. Sites like Yahoo Finance, Bloomberg and Reuters report companies' announcements about stock splits, divestitures, and cash-for-stock takeovers. Search the SEC filings a particular company through the U.S. Securities and Exchange Commission's online EDGAR database to confirm facts and find additional information.
Purchase the stock prior to the announced split, divestiture, or cash-for-stock takeover. In the case of the latter, make sure the purchase price is substantially lower than the takeover price.
Liquidate the stock after the event. In the case of a stock split, wait until shares have appreciated above and beyond the prices they would have as fractions of the original share price. For divestitures, wait until the business unit or assets have been sold and the price of the stock has appreciated before selling your shares. In the case of a cash-for-stock takeover, your shares will be liquidated for you and you will receive a cash payment.
- Companies sometimes split their shares into smaller units so that they become more affordable to investors. Stock splits are often interpreted as signaling management confidence that the shares will go up in price in the future.
- Upon the announcement of a cash-for-stock takeover, the stock that is being purchased will jump up in price so that it is trading a little below the takeover price. Traders can still buy the stock after the announcement to try to earn the remaining value between the market price and the takeover price.
- Asset and business unit sales are typically rewarded in the markets. Share prices tend to go up as more evidence of a divestiture surfaces in the media.
- It's impossible to know the future, and no trading strategy works all of the time. There are no guarantees. Do not bet a substantial amount of your net worth on any particular trade.
- Takeovers, stock splits, and divestitures can be canceled. As a prudent precaution, purchase only stocks you wouldn't mind owning for a while in case the event does not transpire.
- As a rule of thumb, require a 20 percent discount to a cash-takeover price before buying a stock.
- Reverse stock splits are not bullish signals and may indicate that management is not confident in the stock price. Do not trade reverse stock splits.
Joe Escalada is a financial analyst. He earned a Master of Business Administration from the University of California at Davis and has passed all three Chartered Financial Analyst examinations. He has a bachelor's degree from the California Institute of Technology.