No. of Recommendations: 0
A Question:
By Spliting their stock is it not true that the new lower stock price is now less attractive to those who want to short it?
Print the post Back To Top
No. of Recommendations: 0
Greetings daveindeal and welcome to the Motley Fool!

You write:


Looks like you've found me. : )

Interesting question. I have to say that a splitting stock is neither less attractive nor more attractive for short sellers. Remember that when a short seller looks at potential returns, they are looking at percentages.

As a Foolish investor, I hope to make at least 20% on my short sale. Therefore, if I invest $10,000 and short 100 shares at $10 -- and the stock splits -- I will now have 200 shares short at $5.00. If I was originally looking for the stock to return 20% at $10, I would be hoping it goes down to 8; but if it splits, to make my 20% it now only has to go down to 4. It is neither more nor less attractive.

Also, when we look for stocks to short we are looking for companies that are in trouble. Before you think of shorting a splitting stock, remember this (taken from yesterday's Foolish Four article):

<<Sometimes it's done because the company has been performing well, is
excited about its future prospects, and wants to communicate this fact
subtly to the investing community. Often splits occur in the face of new
highs for a stock; thus it's an event dripping with positive associations.>>

In such a bullish scenario, shorting might not be the best position to take.

Hope this helps!

Barbara Eisner Bayer
TMF Venus
Print the post Back To Top