Every investor’s goal is to find undervalued investment and then sell it when it reaches fair value. To find the fair value of a common stock, we need to predict the profits generated by the stock over a period of time. This prediction may not be accurate. After all, nobody can know the future with 100% certainty. When things unexpectedly turn ugly, investors need to guard themselves against capital losses. The way to reduce this risk is by investing in companies with positive net cash.

Net Cash is the difference between cash & short-term investments with the amount of long term debt. We can find this three items on the balance sheet of every company. A lot of times, one can include long term investment as cash. Long term investment can include instruments such as 18 month Certificate of Deposit or treasury bond maturing one year or more. To be on the safe side, let us consider just cash and short-term investments.

You might wonder why we do not subtract short-term liabilities such as accounts payable. Good question. The reason is that accounts payable is normally used to buy inventories. Some of the revenue is also tied up in accounts receivable. In normal business operation, these two things can be used to pay for short-term liabilities. There are of course exceptions such as banks where they use short-term liabilities ( customers’ deposit) to give loans (long-term investments) to businesses or individuals.

Once we understand why we define net cash the way they are, we can then appreciate the function of it. Net Cash defines the financial structure of a company. We can tell companies with strong financial structure by looking at its net cash position. Generally, investing in companies with positive net cash is less risky.

As the word implies, positive net cash means that the company has more cash in hand than long term debt. In other words, the company is less leveraged and less burdened with debt. It can pay its long term debt right away if it wants to. This is the right way to leverage a business.

All of our sample portfolio stock picks have a positive net cash on their balance sheet. The reason is that when our prediction fails, the company is less likely to go bankrupt. When a company has plenty of cash, it can afford to incur losses until its business turn around.

Another reason is that companies with positive net cash can afford to buy assets on the cheap during economic downturn. When the economy is in a bad shape and losses are mounting, weaker companies tend to raise cash by selling off its valuable assets. Companies with positive net cash will be there to buy.

Finally, companies with positive net cash can afford to buy back shares or give dividends even when businesses are bad. It is no surprise. They have more financial muscles than others to be generous. This will benefit common shareholders like us.

There are some investors that feel that companies with positive net cash are not efficient. They reason that companies should take advantage of the power of leverage so that it can maximize shareholders’ return. Well, their view is not wrong. Buying companies with positive net cash might not give you a 10 fold return in one year. But, you won’t lose all your capital in one year either. It is all up to you. Do you want to maximize your investment return with incredible risk? Or do you want to get a decent return while minimizing your risk? I prefer the latter.

Get your free investing idea by visiting our commentary section at http://www.noviceinvesting.com

There are two ways company can give out its profit to shareholders. One is to give out dividends. The other is to buy back its own stocks. Which one is more appropriate? This article will explore the topic further.

The American tax law give a slight edge to stock buybacks. It is taxed once before the company decide to use its profit for stock buyback. (Every profit in a corporation is normally taxed). Dividend payment meanwhile is taxed twice. Once when the corporation reports a profit. Twice, when the shareholders receive it as an income. Most recently, investors receiving dividend income are taxed at rate of 15%.

So, does stock buy back is always advantageous to dividend payment? No, not really. It really depends on what price the company buys its own stock. If a company buys back its stock when the stock price is relatively overvalued, then it is better to distribute it as dividends. Shareholders can then appropriately invest it in undervalued investments.

So, at what point will dividend make much more sense? This all goes back to the fair value of the common stock itself. In a 4.5% interest rate environment, stock trading at a fair value is yielding 7.5% ( a Price Earning Ratio of 13.3 ). This assumes a 0% growth in earning. Therefore, it is desirable for companies to buy back its stock at a P/E of 13.3 or less.

But, wait. Since, dividend is taxed at a 15% rate, company that buys back its own stock at fair value will still saves shareholders 15%. Therefore, buyback still reward shareholder even when the common stock is 15 % overvalued. Based on this, company should continue buying back its stock only when the stock is trading at a P/E of (115% x 13.3) = 15.3. For a 0 % growth, it makes no sense for management to insist on buying back its stock that is trading at a P/E higher than 15.3.

One recent example is Intel Corporation (INTC) which initiates a $ 25 Billion intelligent stock buyback on Thursday Nov 10th 2005. At current price of $ 26.16 and $ 2.24 positive net cash on the balance sheet, Intel is buying back its stock at a forward P/E of 16.72. While this is a high P/E to buyback stock for a company that is not growing, Intel is not a 0% growth stock. Analysts generally expect Intel to grow its earning by 15.5% for the next five years.

Investing Idea is Free. Please visit our commentary section at http://www.noviceinvesting.com

In Continuation of an article Don’t Just Pick Any Dividend, let me follow up with a few signs of company who may initiate dividend cut. Once dividend payment is initiated, management will be less inclined to cut them. Certain circumstances might force them to cut the dividend. Yes, it is embarrassing. But, it may be needed to survive. Business may be slow. Debt payments may be coming due. Whatever it is, dividend cut generally is not a good thing.

Here are several indications that management will cut future dividend:

Huge Loss. When a company is not profitable, dividend cut may be initiated. If the loss occurred for years and no sign of improvement for the foreseeable future, the chance is, dividend will likely be cut.

Negative Net Cash. This means that the company has more long term debt than it has cash. If the firm’s negative net cash is increasing and getting worse, the dividend cut will follow suit.

Negative Cash Flow From Operations. When the company is draining cash operating its business, there is no reason it should keep the dividend payment. The cash can be used for other purposes such as capital expenditure or investing in long term asset to expand its business.

Long Term Debt coming due. If a big portion of the company’s long term debt is coming due, it needs to conserve cash. Even if the firm cannot repay it on time, lenders want to see an effort by the company to conserve cash. To please lenders, the company needs to reduce dividend payment and request an extension for the loan.

If a company has one of these signs, they may not cut their dividend anytime soon. But if a company has all these signs, there is a big chance that dividend cut is the next logical stop. What company currently fit this description? General Motors Corporation is one. It has a huge loss of $ 3.81 Billion loss for the first nine months of 2005. Furthermore, its balance sheet is not stellar. It has a huge negative net cash ($ 31 Billion) and cash flow from operation is negative as well. I am not sure when GM’s long term debt is coming due. If a huge portion of it comes due, dividend cut will be initiated if its business does not turn around.

Get your free investing idea by regularly visiting our commentary section at http://www.noviceinvesting.com

The 12 Rules of How to Avoid Losing and Start Making Money from the Stock Market

RULE 1: WHY DO YOU INVEST?

Make more money, this is the answer to most people. If your reason is to make more money, then ask yourself these three questions:

1.Is your strategy making money?
2.Is your strategy safe?
3.How to increase the profit and minimize the risk?

RULE 2: HOW TO CREATE WEALTH IN STOCK MARKET WITH JUST $1,000

Let say we invest some lower price stocks with just $1,000 in the stock market, invest twice a year for short-to-medium term. If each time the return is double, you will make one million dollar cash within 5 years. If your starting capital is $20,000, after 3 years you will make one million dollar cash.

If you are using the same $1,000 capital, invest twice a year, but the return is only 50%, you will make one million dollar cash after 9 years.

So we can always start small. However, it is very important that we know how to select high profit and low risk stocks.

RULE 3: DON’T GET OBSESSED WITH STOCKS

Sitting and monitoring the market whole day long will not bring you profit. Instead, it increases pressure and misleads your judgment.

RULE 4: NEVER GAMBLE

95% of the people always buy at the highest price. They don’t really know when to buy, just relying on news, rumors and tips. Only 5% of the people knows how to trade at the lowest price. That’s why 95% are losing money, only the 5% are making money. Investment Builds Wealth, Gambling Definitely Lose !

RULE 5: SAY GOODBYE TO NEWS

News used to be able to predict the market trend. But not anymore, it is difficult to judge which news could actually influence the market nowadays.

RULE 6: DO YOUR OWN ANALYSIS, FORGET ABOUT TIPS

Before investing, ask yourself these four questions:

1.How many people have already heard about the tips before you? If many have heard about it before you, this news is already obsolete. The price is already high.

2.How long have the tips been spreading before it reaches you? The next day?

3.Who told you? Listed company director? Or friends?

4.Assuming that the tip is true, would you possibly know about it? Normally insider news is not disclosed.

RULE 7: SELL YOUR STOCKS EVEN LOSING MONEY

It is easier to be said than done.

Sell at a loss is a difficult decision. Your heart will object, and your feeling will say "It is going to rebound, don’t sell." Eventually price dropped further, causing a much tragic lost.

RULE 8: DON’T JUST FOCUS ON MAKING MONEY

How to protect your capital is much more important. Don’t try to make 100% profit. It is already good enough to have a 60% profit margin.

RULE 9: HISTORY WILL NOT ALWAYS REPEAT

Everyone expects to make some money from the stock market before Christmas, New Year, annual budget announcement or election, but the stock market is not always bullish during these events. We can say history is not always repeated. The best way is “Let the Market Lead us”.

RULE 10: QUOTES FROM WARREN BUFFET

There are only two rules to make money in stock market:

The first rule: Never lose your money. The second rule: Never forget the first rule.

RULE 11: TURN BAD STOCKS INTO GOOD STOCKS, DON’T JUST HOLD YOUR STOCKS

Don’t hold your stock too long, there is a value when stocks are sold.

How long have you been holding your stocks until now? Since Year 1993? 1997? Or Year 2000?

Why didn’t you exercise your stocks? Long term investment strategy is not practical anymore. Even the blue chips also crash when the market collapses.

The best strategy is to sell the stocks that are not earning money, and reselect some good counters. Buy low, sell high for several times will earn you more than enough to compensate the lost.

RULE 12: WAKE UP FROM MISTAKES

Stop investing if you are not sure of when to buy or sell.

Without the knowledge of investment, you are bound to lose again. This is an age of information. Investors are using knowledge, techniques and strategies to make money. Without investment knowledge, how do you protect your money?

Building wealth through investing starts with securing your capital.

Author: Dr. Steven Lee (Ph.D) is the creator of “Power System” and also the author of two books on how to invest in stock market. There is "Creating Wealth in Stock Market" and "The Magic Idea of Getting Rich". Free e-book "Money Fish"
Your New Way to Become a Millionaire
Website: http://www.DrStevenLee.com

We want to look at shorting for a moment because here we have something that is quite profitable if done right, but can hang you out to dry if not. As you know, one of the problems with shorting is the "uptick" rule, where you literally have to wait on an uptick to jump on a short (this means the stock must have advanced some.) That’s why you rarely, if ever, get the short filled right at the level you want. For instance let’s say you like XYZ short below the $50 level. Well if it’s sinking like a rock, and blasts belows 50, 49.95, 49.90, 49,85 and "then" finally bounces, you might get filled at say 49.90 or so.

This isn’t really a problem, it’s just something to keep in mind when searching for a short. You won’t get that short right at the support line most times. But you can try and even out he odds in your favor. How? Suppose you love a short on XYZ at $50 because every time it’s lost the $50 level, it sinks like a proverbial rock. Well if it plunges under 50 and you get no uptick to short, don’t despair. If you sit tight, chances are the stock is going to bounce and try and regain that 50 level again. This is usually a good time to place that short.

Suppose it does fade 50 and hits 49.87, then starts bouncing. Yes, it’s possible it reclaims 50 and keeps heading higher, but it’s more likely that 50 level will now be a resistance level and if you short on the last hurrah push to hit 50, say at 49.95 or 96, chances are good it will not make the breakout and will fade back down. That failed reclaim attempt is generally the best short you can have since the market senses it couldn’t retake 50 and lets the stock fall.

Now, ETF’s don’t have this problem and they are easier to trade on the short side. Take the BBH for example. It is very volatile and since you don’t need an up tick to jump on it as a short, it’s often fun to short it the moment it loses a significant support line. Even if it bounces shortly after, you can often pocket 30 cents or more on the initial fade and for the daytraders out there, that’s fine money. If you are "new" to shorting stocks, it’s a recommendation that you start with ETF’s to get the hang of it. It will make shorting stocks much easier.

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In life, you have to learn to walk before you can run. In the stock market, you have to learn to lose before you can truly win.

Sure, your first trade may be a winner, but to consistently make money in the stock market you have to learn how to lose. More to the point, you have to learn how to cut your losses.

The majority of people who dabble in the stock market see themselves as smart, educated and sharp. Self-belief is great. The most successful people in the world have a strong belief in themselves. Some of the most unsuccessful people in the world also have a strong belief in themselves. So what’s the difference between the successful and the unsuccessful?

One major difference between successful traders and unsuccessful traders is the ability to admit when one is wrong. A successful trader will cut their losses before they get out of hand. An unsuccessful trader will let their losses grow in the false belief (hope) that things will pick up.

It would be nice if every stock pick was a winner, but when you get the odd loser you better make sure you cut that baby lose before you lose some big dollars.

The Stop-Loss

Before you even consider entering a trade, you should determine your stop-loss point. Your stop-loss point should be set at a price that you’re willing to sell your stock at should things turn bad. The price you pick will vary depending on your financial position and the particular stock being considered.

You may want to set a stop-loss exactly 8% under your purchase price, or you may want to set it just below some clear resistance in a chart (if the stock falls below the resistance level, you can be fairly sure things will continue South for a while). The most important thing is to test your system. If you set your stop-loss too close, you’ll never be in the game when the stock turns good. If you set your stop-loss too far away, you’ll end up losing too much money.

Remember, the main aim is to make a profit across your entire portfolio. Imagine you owned $1000 worth of 5 different stock. You set a stop loss at 10% current market value; so if the value of a single stock drops to $900 you’ll sell at that price. Even if you are wrong with 3 of the 5 picks (a $300 loss), you only need to make 15% on the remaining 2 stocks to break even. What if those remaining 2 stocks made 50% (which is very realistic if you pick your entry right).. You’d actually profit $700 across your entire portfolio despite the fact 60% of what you picked were duds!

Starting with 5 positions worth $1000 each: $5000
3 losing stocks lose 10% each: -$300
2 winning stocks make 50% each: +$1000
Total = $5700

Modern trading systems have completely automated stop-loss systems. This makes it so easy to set stop-losses that you have no excuses for losing big in a single trade anymore! In fact, you’re mad if you don’t take advantage of stop-losses. The only trick is setting them wisely. You’ll learn how to plan and time your entry and exit points on this site over the next few months.

Until then, good luck and keep on learning..

Learn how to win on the stock market by following the Australian Stock Market Technical Analysis web site.

There are several ways to profit from a falling stock, but for tonight we are going to discuss the two most basic principals, shorting stock versus buying "put" options.

If you have been with us for any length of time you know I have written many times about how to "short" a stock. Basically you are simply selling a stock now, taking in the cash for the sale, and "buying back" or covering the sale at a cheaper price. so if you "short" ABC at 60 dollars and you sold 1000 shares, you took in 60,000 dollars. Now if ABC falls to 50, and you "Cover" you are buying it back cheaper. In this case you will spend 50,000 dollars. The difference between where you sold and what you spent, 10 G’s is your profit.

That really is as easy and as basic as it gets friends. Don’t let all the talking heads throw you a curve ball, shorting is easy and its really no more risky than going long as long as you use stops to protect yourself. Since the market goes up and down, if you only play the long side, you are missing a lot of profit potential.

But there are problems with this approach. First you need a margin account to do it, all short sales are through margin. Second, it eats up a lot of your buying power because when you go short, you are holding that position with margin that will tie up your money.

The other play is a put option. Here again Wall Street has tried to buffalo the average investor into thinking options are for the big boys. What nonsense! Anyone can and should use call and put options as a trading strategy. The risk is limited, and the returns can be phenomenal because of the leveraging inherent in options. With a put option, you are placing a bet that the stock is going to fall. Win the bet and you will win big time. Lose the bet and just like Vegas, your loss is limited to how much you bet.

If the market is going to run up for a few weeks and then spiral back down, which way should you play? That is impossible to say, we don’t know your style, your risk tolerance, your bank account balance etc. but for us it’s an easy call, put options win out over shorting in a scenario like that.

By using put options we can use a relatively small amount of money to be in several "plays" and each of them could return several hundred percent returns. Look at it like this. If you short ABC at 100 and it falls to 60 fantastic! You made 40 points and 40%. But if you buy put options for 1.75 and they go to 10.00, what is the percentage there? Over 500%. And look at the cost. It’s next to nothing, to get such a shot at big returns.

For our money, when the time is right, buying puts against the Dow Jones Industrials, the NASDAQ 100 and the Composite and select individual stocks that carry high P/E’s will be the way to go as we feel those will be taken to the woodshed for a spanking.

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When creating wealth in the stock market, you need to build a certain understanding of the risks involved. How do you assess the risk? When do you listen to other people’s opinion and when do you make up your own mind based on training and research?

Well, for starters, don’t listen too much to others. Who is going to look after your money best? You, of course! Then why not learn for yourself how to be a stock market investor instead of listening to advice from possibly unreliable sources.

To start with, learn basic strategies. If you understand how the stock market works to a certain degree, then maybe you should look at derivatives. These are highly leveraged investment instruments and need to be understood properly to be used to their full advantage.

Once you understand stock market derivatives (and you will if you apply yourself), you can move on to more advanced strategies and this will open up some interesting possibilities for you.

For instance: I invest with returns around 15 – 20% per month. I learnt this with very little knowledge of how to be a stock market investor. I achieved this in less than 2 years. I know several investors who learnt this in 3 to 6 months.

There are also bad months. This is where money management comes in. Learning to manage your investments with a proper strategy and money management is vital to your success in the stock market.

You have plenty to gain by learning from other enthusiastic traders. Visit stock market or wealth creation forums. Learn from other like minded people. A little bit of effort, fuelled by dreams will get you a lot further than little effort with no dreams.

Remember this is all about leverage. Learn to leverage yourself and the income potential rises with it.

Many will say that the risk rises with the income potential. If you agree with that, then read this quote by a very seasoned stock market investor and think again:

“Risk is NOT understanding what you are doing” - Warren Buffet

Think about it. If you didn’t think – “YES, that’s true!”, then read it again and again until you really get the point.

What some people perceive as risky, others do as an everyday task, as if it is second nature. It’s just like having a casual walk to the local shop.

Driving a car is risky. Especially if you haven’t driven before, or have little experience. Maybe you haven’t bothered learning the basic traffic rules.

How risky is it for you to drive a car when you know the traffic rules, have made the effort to practise and stay aware of any changes that may affect you in that environment?

Not very risky at all!

Same task. Very risky for some. Hardly any risk at all for others.

Compare this to being a stock market investor. If you enter a trade with little or no knowledge, it would be fair to say it is very risky. Do it with base knowledge, research and networking, then it would be fair to say that you have reduced your risk dramatically.

The very same trade will have different outcomes depending on how you react to the market place. Hence, the different risk levels in the very same situation.

So hang in there. Utilise resources like stock market forums. Do a course or attend a seminar to fast track your learning. Educate yourself with things that WILL make a difference to your future. Believe me, whoever said money doesn’t buy happiness, either didn’t have any money at all or never went without.

Of course, money doesn’t buy happiness. But it sure does help. I know which option I prefer.

Let me think. Here are my financial options:

Option number 1 – Little or no wealth.

• Work until I’m 65.
• Put my kids through average under funded schools because I have no choice.
• Having to budget most or all of the time.
• Trying to make ends meet.
• Keep a relationship and a happy family while always struggling to pay the bills.
• Have very few holidays.
• Constantly worrying about fuel prices.
• Have little or no money for charities.
• Etc, etc.

Option number 2 – Plenty of wealth.

• Enough money.
• Comfortable living. Stress-less lifestyle.
• Work until I want to. NOT until I have to.
• Work as a hobby. Do what I want to do. With a passion!
• Put my kids in the schools I want to. It’s my choice.
• Support as many charities as I like. Make other peoples life easier.
• Support my local community financially, because I can.
• Holiday as much as I like.
• Make ends meet ALL of the time. Who cares how much the grocery bill is?
• What fuel prices? What’s the issue? When fuel prices go up, so do my shares.
• Etc, etc.

If I cannot be happy using Option number 2, then I’ve got some serious problems!

You choose your own destiny. Don’t let others make up your mind for you. Make wealth creation a part of your financial education.

Happy researching, and good luck to you in your quest for financial independence.

Sean Rasmussen is a Property & Stock Market Investor as well as a Life Coach. You can download his stock market investing ebook on his website http://www.universalwealthcreation.com

Last week, the yield curve inverted, when the 10-year Treasury bond yield fell below the two-year Treasury bond yield. An inverted yield curve has always predicted a profits recession. Moreover, yield curve inversions have always predicted slower economic growth or recession.

The first chart below is an SPX 2 1/2 year weekly chart. Major support levels are the previous four-year high at 1,246, middle of weekly Bollinger Band at 1,230, and there are several support levels around 1,200, i.e. Price-by-Volume bar, lower line of the rising wedge, and lower weekly Bollinger Band. Also, 1,200 may be psychological support.

Major resistance is the multi-year Fibonacci level at 1,253, and the falling 20-day MA, currently at 1,262. Also, SPX fell below the December low at 1,249 Friday and that became resistance throughout the day. The chart suggests SPX will fall to the lower line of the rising wedge within three months, i.e. to 1,200.

Normally, the first two days in January are bullish (although, the market fell sharply over the first two days of last January). So, if SPX rises to around 1,260, next week, that may be an opportunity to buy SPX puts. However, a break below 1,246 may accelerate selling to 1,230, which may be an opportunity to buy calls.

Monday is a holiday. Economic reports next week are: Tuesday–Construction Spending, ISM Index, and FOMC Minutes, Wednesday–Factory Orders, and Auto Sales, Thursday–Unemployment Claims, ISM Services, and Oil Inventories, and Friday–Nonfarm Payrolls, Hourly Earnings, and the Unemployment Rate.

Some holiday retail sales data will be reported next week. Earnings season starts the week after next. However, the inverted yield curve may dampen optimism about future earnings. Also, the FOMC meets January 31st and Bernanke will replace Greenspan. Moreover, OPEC meets in late January.

The next FOMC meeting will be critical for both the stock and bond markets. If the FOMC tightens again January 31st, I suspect, the stock market will fall and the yield curve will invert further, i.e. short-term yields will rise more than long-term yields, since bond yields are not much higher than the Fed Funds Rate.

However, if the FOMC pauses, that would immediately boost the stock market, while the yield curve would steepen, i.e. short-term yields will rise less than long-term yields. Regardless, after the next FOMC meeting, bond yields should rise. So, TLT (long-bond ETF) may be a short. The similar same period second chart indicates resistance at upper Bollinger Band.

If low and inverted yields persist in January, the stock market may fall into the FOMC meeting, while TLT rises (and bond yields fall further). Consequently, the performance of TLT (and long-bond yields) may predict the stock market, over the next few months. However, it may be a rocky January for financial markets, until there’s greater clarity from the Fed.

Charts available at PeakTrader.com Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

Years ago (pre bubble days) a stock split was still something special. Although the idea of giving someone twice as much stock for half the price is statistically insignificant, the fact is an entire psychology sprung up around them. In fact, a book called the the Anatomy of a stocks split was written, and many sites sprang up focusing on stock splits and how to play them.

So what is it about stock splits that makes them work as winning plays? Well, several things, although if the bear market taught you anything it taught you that when the bear is in charge, even splits don’t work well. But in a flat to rising market, I think it all boils down to one thing, "price". As a split approaches, people buy into the stock because they are going to get twice as much of it, and after the split takes place, give it a few weeks and everyone simply considers the stock to be "cheap" again.

Look at MMM. They did a 2 for 1 split on September 30, 2003. At the time the stock was 140 dollars per share.Well that certainly seems pretty expensive, and it was struggling a bit at that price. So, when it did a 2 for 1, it became a 70 dollar stock. Hey, not so bad! So, all the people that wanted MMM at 140 but couldn’t afford it or justify it, jumped on it at 70. Well, now it’s 84. That would be 168 pre split.

The fact is that MMM has split 3 times in the past, and all of them were two for 1 splits. If they hadn’t done them, MMM would be 700 dollars per share! So, investors look back over history and see that most of the time a good company will reach a "high" split and reach that high again. Some can do it over and over. Look at MSFT. It’s split 2 for 1, 9 times, and except for this last one, has run up to it’s "highs" within a couple years of doing it’s split. This is how so many secretaries at MSFT have become millionaires.

Let’s suppose you worked at MSFT back in 96, and they gave you just 1000 shares as a bonus. then the stock hit 50 and they did a 2 for 1. Now you had 2000 shares but at 25 per share. A year and a half later, they had run back up and they split again, giving you 4000 shares, once again at 25. Another year, another run up and "boom" they split again. Now you have 8,000 shares. but notice, we are only on split 3! then as the years went on, your 8000 became 16,000 , then 32000, then 64,000, then 128,000, then 256,000, and finally 512,000 shares. Even at today’s "low" price, you are a multi millionaire.

The multiplier effect is what causes stock split plays to be profitable. Then of course there is the trading aspect, as traders learned that stocks tend to rise into a split, so they hopped on board and made it even more self fulfilling. We have advocated several ways to playing stock splits, first, the "pre announcement" where we’d try and find who might be announcing a split, then the "announcement pop" where we’d play the announcement. Then it was the "pre split run" where we’d try and get in for the split run up. Then we’d sell the actual split, and come back in for a post split run. Was it profitable? In the bubble days of 98 -2000, there was nothing stronger on earth than a stock split. Nortel split and ran up to it’s highs and split again 2 more times in 18 months. It was insane and it was unbelievable, but it happened.

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