A stock split occurs when a listed company splits its outstanding shares into more shares, typically to make the shares more affordable for retail investors and attract more investment. During a stock split, the company’s market capitalization and the overall value of each shareholder’s investment remains the same, but the price of each share decreases as the number of shares increases.
On the other hand, a consolidation or reverse stock split happens when a company aims to decrease its outstanding shares and increase its share price. Some stock exchanges have a minimum share value, so a company may perform a reverse stock split to avoid being delisted from that exchange. This action can also make a company appear more valuable to potential investors, as a higher-value share may boost sentiment.
When a stock split or stock consolidation takes place, the company determines the split/consolidation ratio, which the ratio by which the number of shares and current share price will adjust.
Stock split example
Apple has announced a stock split at a ratio of 10:1. On the ex-date, you have 100 shares trading at $5 per share.
We will close your original position and open a new one. After the split, you will have 1000 shares trading at $0.50 per share. Therefore, the total value of your position remains the same.
Stock consolidation example
Apple has announced a reverse stock split at a ratio of 1:10. On the ex-date, you have 1000 shares trading at $50 per share.
We will close your original position and open a new one. After the consolidation, you will have 100 shares trading at $500 per share. Therefore, the total value of your position remains the same.
Please note that you do not need to take any action for this mandatory corporate event. We will assist in booking these positions accordingly.
How does stock split/consolidation affect my CFD account?
If you have a position on a company that performs a stock split or consolidation, we’ll close your original position at its opening level and open a new trade on your behalf. The new position will reflect the ratio of the split/consolidation, ensuring that you don’t gain or lose any capital in the process.
If you have a stop on your position, we’ll close the original position at its opening level and open a new position that reflects the terms of the offer. Any stops or limits attached will also be adjusted accordingly, ensuring that your monetary risk remains the same.
Please note: This information is intended as a generic example, and subject to change at any point. It may not apply in every scenario.