Stock split

A stock split is a corporate action in which the issuer increases the number of shares outstanding and reduces the par value and the market price of each share in the same proportion. The shareholder's stake in the equity, the rouble value of their holding and the company's market capitalisation do not change: the only thing that changes is how many pieces the same capital is cut into. The holder of the security does not have to pay anything or subscribe to anything — the additional shares arrive in the account on their own.

How it works technically

The split ratio is announced by the issuer: the decision is taken by the shareholders' meeting, after which the changes are registered in the terms of the issue. On the appointed date the depository recalculates the account balances, and the broker's terminal already shows the new number of shares at the new price. The ticker is usually kept, whereas the lot may be revised by a separate decision of the exchange — the number of shares in a lot and the split ratio exist independently of each other.

The direct consequence of a split is a lower minimum amount needed to buy into the stock. This is usually followed by a rise in the number of trades and small orders: the order book becomes deeper, the tick size becomes relatively smaller, and the spread in stocks with low liquidity narrows noticeably.

Example: an issue with a high price per share

The more expensive a single share is, the more its price constrains a small portfolio, and the more often a split is discussed for such an issue:

Where the term is misunderstood

The main mix-up is to confuse a split with a placement of new shares. On the surface the number of shares grows in both cases, but in an SPO or an additional share issue new money and new owners appear, and the stake of the existing shareholders shrinks; in a split not a single rouble comes in, and everyone's stake stays the same.

The second trap is reading the chart. The price break on the day the split takes effect looks like a gap after bad news, although there was no fall at all. To prevent such a false crash from appearing, a price history adjustment is applied: past quotes are recalculated to the new share count. If, on the contrary, the number of shares decreases and the price rises, that is a reverse split, and the reasons behind it are different.