> At the time we had a family friend that was working for a company about to announce a stock split along with a very good earnings report. He told me when to go all in on that stock, and i did exactly that. The day after that split my portfolio had more than doubled, beating the class record by a significant margin. Said record stood until the teacher retired.
That family friend seems like a complete idiot for passing on that information.
Plus a stock split on its own has no change to the value of a stock. There’s no reason for it to double overnight. In fact the direct effect on the price is the opposite as you have twice (or K times) as many shares and each is worth half (or 1/K). So the net effect is zero.
In theory you are right that stock splits have no bearing on returns, but in practice it is well documented (see e.g. [1]) that "stock splits and reverse splits often result in short-term abnormal returns even though such split events do not change any fundamental factors affecting the valuation of a firm's stock."
> We provide evidence that the incomplete adjustment of share prices to splits or reverse splits can be attributed to heterogeneity in traders' cognitive abilities.
The split was followed by the stock very quickly regaining it's previous per share value over the course of the trading day, though maybe it was over the next week; this was a few decades ago.
And i agree that he shouldn't have told me. A few years later i actually told him something along those lines. I appreciated it but he exposed himself to a lot of legal risk.
That family friend seems like a complete idiot for passing on that information.
Plus a stock split on its own has no change to the value of a stock. There’s no reason for it to double overnight. In fact the direct effect on the price is the opposite as you have twice (or K times) as many shares and each is worth half (or 1/K). So the net effect is zero.