What is a stock split or consolidation / reverse stock split?
A stock split occurs when a listed company splits its outstanding shares into more shares, often to make the shares more affordable for retail investors and therefore attract more investment. The company’s market cap and the overall value of each shareholder’s investment stay the same during a stock split, but the price of each share is reduced as the number of shares increases.
A consolidation or reverse stock split is when a company wants to lower the number of outstanding shares and increase its share price. Some stock exchanges have a minimum share value, so a company may employ a reverse stock split to avoid being delisted from said exchange. This can also take place to make a company appear more valuable to potential investors, as a higher-value share could improve sentiment.
How does a stock split or consolidation work?
When splitting stocks, a company will first determine a split ratio – this is the ratio by which the number of outstanding shares and current share price will adjust. For example, if the stock split ratio is 2:1, the number of shares will double, and the share price will be halved.
Stock split example:
You own ten shares in a company, each valued at £100 prior to a stock split of 2:1, giving you a total of £1000 worth of shares. After the split, you own 20 shares, each worth £50 (£100 ÷ 2). Your total investment values stay the same at £1000.
A consolidation or reverse stock split would have the opposite effect, with the share price doubling and number of shares halving – also without affecting the total value of your initial investment.
How does a stock split or consolidation affect my spread bet or CFD account?
The standard process is for us to close your original position at your initial trade opening level (ensuring no profit or loss is realised) and open a new trade on your behalf reflecting the ratio of the split/consolidation.
Any attached stops or limits will be adjusted according to the terms of the split/consolidation to ensure your monetary risk remains the same.
How does a stock split or consolidation affect my share dealing or ISA account?
The standard process is for us to close your original position (date of stock split) at your initial purchase price of the shares (ensuring no profit or loss is realized) and open a new trade on your behalf with the number of shares in accordance to the terms of the split/consolidation and at a book cost of zero. If you need to change your book cost, you can find out more information here.
This process may affect your profit/loss figures as the number of your shares will increase (for stock splits) or decrease (for consolidations) in proportion to the split ratio but the book cost will reflect as zero. To correct this, you will need to manually adjust your book cost.