What is Stock Split? How it works on eToro?

A stock split is a fairly common phenomenon in the markets and takes place on different exchanges around the world and at different times. This guide will help you understand what stock splits are, what effect they have on your stock positions and how eToro manages them on the platform.

What is a stock split?

The term “stock split” is by itself pretty straightforward. A company divides its individual shares into smaller parts based on a certain division ratio. For example, if a company advertises a five-for-one stock split, and each current share in the company is valued at $ 400, after the split, the share price would drop to one-fifth, or $ 80. During this event, the current number of shares of each shareholder is multiplied, based on the split ratio.

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Why companies do stock split?

A company may have several reasons for deciding on a stock split. Here are some things to keep in mind about the reasons for the division of shares:

Attract retail investors

Some investors prefer not to invest in certain stocks if the price of each share is too high. Carrying out a split would lower the price of outstanding shares, allowing more investors to buy shares. However, while many institutional investors continue to exclusively buy whole shares, many retail investors choose to buy fractions of shares through innovative short and long-term investment platforms such as eToro.

Greater liquidity

The greater the number of shares that exist in the market, the greater the potential for liquidity. More actions can mean more transactions and more money changing hands.

Psychological price

Analysts often claim that a given stock is “overvalued,” meaning that its current price represents market sentiment, rather than its true value. Dividing a stock lowers its price considerably, thus offering the psychological effect that the stock price is more realistic.

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When is a stock divided?

There is no fixed formula. Some companies split their stock price every few years as long as they show steady growth, while others refuse to split their shares, no matter how much the price of each individual share increases. When it comes to setting dates, companies typically allow a minimum of several weeks between the announcement and the actual split.

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How many times can a share be divided?

In theory, infinite times. Companies can divide their shares as many times as they want. For example, between 1987 and 2003, the tech giant Microsoft split its shares nine times. However, as this operation requires documentation and bureaucracy, it is very likely that companies will only divide their shares when they believe that it is a good and timely decision for their business.

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Correlation of Stock and index prices

Sometimes a stock split can influence an entire index. For example, the weighting in the DJ30 index is calculated based on the share price. This means that if a stock splits, its proportionate share of the index drops significantly. For example, Apple’s 2020 stock split went from being the highest-weighted stock in the DJ30 index to falling to number 16.

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How does a stock split affect the price of a stock?

Naturally, a stock split does not offer guaranteed results. The value of each individual share is divided, but the total market capitalization of the company remains the same. However, throughout history, stock splits have generally been beneficial to the company doing them, at least in the short term.

According to Bespoke Investment Group, between 2015 and 2020, the fluctuation of the average price of shares of companies that announced splits has been 2.3% more from the moment the split was announced until the moment it took place. Additionally, about 70% of these stocks outperformed the S&P 500 Index during that period. While normal stock also fell 0.3% immediately after the split, over the next year, these companies gained an average of 9.8%.

Despite the above, it is important to note that there are numerous factors that can influence a stock’s price, and the decision to split a stock may coincide with other factors that can cause a stock’s price to rise. Therefore, as positive as this past performance is, it may not be a reliable indicator.

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What is a reverse stock split?

A reverse stock split is the opposite of a stock split. In a reverse split, the company consolidates the shares, reducing the total number of shares. For example, if a given company advertises a four-for-one reverse split, and each share is currently valued at $ 50, the new share price would be $ 200, and a shareholder who has eight shares would now have two.

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How does a reverse stock split affect investors in the short and long term?

Unlike a normal stock split, in which the number of shares is simply multiplied by the split ratio, a reverse split could leave a shareholder with fractions of shares. For example, if anyone shareholder owns five shares and the reverse stock split is four times one, they would end up with 1.25 shares. In this case, most companies would simply liquidate the share fraction and provide shareholders with the difference in cash. However, at eToro, if this event occurs, positions will not be affected, as eToro allows the ownership of fractions of shares.

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How do stock splits work on eToro?

eToro has numerous short and long-term investors who use the platform to invest in stocks with a 0% commission. eToro has a large stock offering so it is no stranger to stock splits and has managed them in the past.

When such a market event occurs, eToro creates a seamless process of applying the split ratio to all corresponding figures. The change will be applied to the total unit count and the current or average price. However, the value of each position will not change.

If a reverse split of shares is performed, a position that was previously made up entirely of whole shares may now have fractions of shares. However, the division will not change the total value of the position.

eToro can contact its users in advance and inform them of an impending split and if any action is required on their part, although it is unlikely that they will need to do anything.

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How to evaluate a company?

At eToro, they know that information is power when it comes to investing online. That is why today eToro wants to present to you in this article the main indicators that you should take into account when evaluating a company. This will help you avoid more than one unpleasant surprise and can build your own personalized trading plan.

Ignoring these stock market indicators and trading without paying any attention to them is the equivalent of driving a car with no brakes, crossing a crosswalk with your eyes closed, or flipping a coin and wishing it would come up heads or tails. As we know that you want to do just the opposite in your operations, we explain the fundamental aspects that you must know to be able to take advantage of the indicators like a true professional of the markets.

If you are already familiar with some indicators, this article is also for you, as we will cover some that are not always taken into account when trading and that can give you a competitive advantage over other traders. In addition, it will serve as a supplement after you have read how to use our ProCharts.

We will mainly address three types: fundamental analysis indicators, analysis indicators technical, macroeconomic indicators, and monetary indicators. Not to be missed!

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What is an indicator and why do you need it?

Indicators are the compasses of any serious trading system. They are instruments that allow us to refine our valuation of companies. Instead of being guided by impulses and hunches, by including stock market indicators in our operations, we allow us to distance our heart from operations and thus considerably increase the chances of success. Together with eToro’s trade copy feature, the indicators serve to effectively combat the perennial problem of trader psychology.

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Possibilities and limitations when using indicators

The possibilities offered by the indicators at our fingertips are numerous. On the one hand, they allow us to make operational decisions based on objective data. On the other hand, they make it possible for us to distance ourselves from our emotions by opening and closing positions, so treacherous on so many occasions. They also allow us to systematize our trading plan, which makes it possible to closely monitor our results and to be able to analyze when and how our maximum profit and loss streaks occur. At the level of limitations, there is basically only one: use too many indicators that end up saturating and paralyzing us.

List of MT4 & MT5 Technical Indicators and How they work

The fundamental analysis indicators

By fundamental analysis indicators, we understand all those that allow us to value a company by its fundamental value. They help us calculate the real value of an asset regardless of the price action that is being recorded at any given time.

1. The price-earnings ratio.

It is also popularly known in financial jargon by the acronym in English PER (it has nothing to do with the better-known meaning of PER, for example, in Spain). It is the financial ratio preferred by investors. It is calculated by dividing the market capitalization by the net profit of a given company. A high PER can be interpreted as overbought security and vice versa, but by itself, it can be misleading. But in combination with other indicators, it provides invaluable information in the valuation of companies.

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2. The dividend.

As a general rule, the higher the dividend historically paid, the higher the purchasing pressure and vice versa. Announcements of dividend cuts or cancellations by a company almost always have a bearish impact on prices. It is, therefore, one of the most powerful indicators when it comes to operating in the stock markets. At your fingertips, you also have our DividendGrowth tool, which greatly facilitates your work with this indicator.

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3. The news.

You are interested in knowing the news published in both specialized and general media, not to blindly follow their omens and predictions, but to better understand what we call market sentiment. This way we can anticipate trends in the price action of the asset prices in which we invest. The main financial news is reflected in the economic calendar, in which all financial events are recorded, classified according to their level of relevance. eToro offers you a detailed economic calendar, saving you time filtering financial news.

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Technical analysis indicators

By technical analysis indicators, we mean all those that provide us with data exclusively from the price action of an asset. They set aside any kind of additional evaluation and work exclusively around the support and resistance of the quotes, usually represented on a bar or Japanese candlestick chart.

1. The RSI (Relative Strength Index).

It is the oscillator indicator most valued by investors. It tells us the relative strength of bullish versus bearish impulses in price action. It also allows us to identify on the chart the divergences between the movements of the price and the value provided by the oscillator. It also helps us to know when an asset is overbought (value above 70 in fast signal, above 80 in normal signal or above 90 in slow signal) or oversold (value below 30 in slow signal, below 20 for normal signal or below 10 in slow signal).

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2. The moving averages.

We are facing one of the technical indicators most used by operators. They represent graphically a line generated statistically by aggregation of successive values. They change based on the number of days they take into account or the importance they give to the last few days or the volume of price action. They also allow you to build trading strategies based on the crosses they make. The crosses of the moving averages of 50 and 200 periods stand out especially. We speak of a golden cross when the 50 moving average crosses up to the 200 and a death cross when the 200 moving average crosses down to the 50.

7 Main Technical Indicators & How to use them on price chart

3. Fibonacci retracements.

Leaving aside the mathematical complications of its calculation, since the charts automatically perform the calculations, this technical analysis indicator indicates possible levels of support and resistance. It projects them from previous movements and accurately reflects probable levels of position opening and liquidation.

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4. Volume.

Although it is not available in all tradable assets, when we have access to the volume we have one of the most valued and useful technical indicators. Why is it so attractive to consider volume when trading? Because it allows us to anticipate the plans of the strong hands, that is, the market participants with the greatest power of influence. Thus, for example, a break to the upside of an accumulation range that is not accompanied by an increase in volume is often seen as a failed feint that often changes direction quickly, leaving less-experienced traders trapped in a position.

If you want to know more before Skip to the next section, remember that you have more information available in eToro’s specific technical analysis guide.

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Macroeconomic indicators

The CPI (Consumer Price Index)

It is the indicator that reflects inflationary (price rise) or deflationary (price drop) trends in a country’s economy. It is reliable data to calculate when is a good time to open or close stock market operations since it is normally endorsed by the official statistical institutes of each country ( the INE in the case of Spain ).

The risk premium.

It is the simplest way to know how investors react to political and economic decisions taken in a country, sinceit reflects the risk of impact of the debt perceived by the creditors. It can be very useful when deciding to enter the stock market of a given country.

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Monetary indicators

Also known as central bank indicators, they reflect the monetary policies of the main economies and are a key element in trading on eToro in the foreign exchange (Forex) market or with bank securities.

Interest rates stand out as the main monetary indicators since they accurately reflect the price of money. They allow us to know if we are on the verge of an expansive or contractive cycle, information that can help us a lot when entering or exiting the market.

There are also subtypes in these indicators. Of particular note is LIBOR, the London offer exchange rate. It is a reference rate that is published every day and reflects on what interest banks lend money to other banks with unsecured funds in the interbank market. It gives us very interesting information, especially when it comes to evaluating risks in our stock market operations with stocks in the banking sector.

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Essential tips for using indicators optimally

Less can be more.

Remember that it is not necessary to use all of them at once to get good results. In fact, going overboard with too many indicators at the same time can be extremely counterproductive: we could end up undecided and overwhelmed.

Trial and error, trial and error.

Try, try, and try again until you find the recipe that works for you, according to your own trading strategy, which will largely depend on your psychology and your preferences when entering and exiting your positions.

They are not a crystal ball.

The indicators are not in themselves infallible. Market-specific components, such as irrationality, bubbles, or any other factor can affect their effectiveness. In addition, an indicator can practically always be correct, but it does not indicate the time window in which its prediction will occur.

And so far our article on the main indicators to operate in the financial markets. You are now familiar with the different types of indicators out there (fundamental analysis, technical analysis, macroeconomic, and monetary) and you are ready to refine your investment strategy on eToro. We hope you have learned a lot of new things about the indicators and that they have inspired you to improve your trading, whether you are a newbie or a veteran in the financial markets. Do not forget that a trader with a refined strategy based on the balanced use of financial indicators has already won a good part of the battle to stay away from the red numbers.

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