Stock Split: What It Is and Why Companies Implement It
One of the key corporate actions—a stock split—helps companies enhance liquidity, expand their investor base, and optimize market performance metrics. In this article, we will explore what a stock split is, why it is conducted, the procedure involved, and the implications for investors. We will also examine reverse splits, their influence on technical analysis, and the strategies that can be employed before and after the split.
1. Definition and Mechanics of Stock Split
What Is a Stock Split?
A stock split, or stock division, is a corporate action in which each existing share is divided into several new shares at a proportional reduction in price. The total market capitalization remains unchanged: investors receive a greater number of shares at a lower price. This is often compared to breaking a large bill—while the denomination decreases, the total amount remains the same.
The obvious consequence of a stock split is a more uniform price distribution: the charts appear smoother, and sudden spikes caused by large orders disappear. This improves conditions for algorithmic and institutional strategies that rely on predictable volatility.
Split Ratio
The split ratio is determined by the board of directors and can be any variable such as 2-for-1, 3-for-1, or 10-for-1. In a 5-for-1 split, 100 shares priced at 500 ₽ become 500 shares priced at 100 ₽. It is important to consider the stock's divisibility according to the stock exchange's minimum lot requirements: some platforms demand a minimum price per lot.
Companies often choose a split ratio of 4-for-1 or 3-for-1 to keep the price within the 50–150 ₽ range, which is considered "psychologically comfortable" for retail investors. The selection of the ratio is frequently based on historical trading analysis and target audience considerations.
Mechanics Steps
The first step is the board of directors approving the split. Then a shareholder meeting agenda is established, where the proposal is voted on. After the decision is registered with the regulator (e.g., the Central Bank of Russia) and the stock exchange, technical changes are made in the trading system: the number of shares is recalculated, and market capitalization is adjusted.
On the "split dividend" date, owners of old shares automatically receive new shares—no additional applications or payments are required. This paperless procedure ensures the continuity of trading and eliminates calculation errors.
2. Objectives and Motivations of Companies
Enhancing Liquidity
A stock split lowers the price of the security, attracting more market participants, particularly retail ones. The lower price allows the stock to reach a broader audience, increasing the average daily trading volume and decreasing the spread.
Companies with low liquidity often suffer from volatile price swings: large orders can cause significant fluctuations. The split helps smooth out these effects: dispersing shares among a larger number of holders stabilizes supply and demand.
Accessibility for Retail Investors
A high stock price can be a barrier for small investors and newcomers. After a split, the price of a single share can fall from thousands to hundreds of rubles, reducing psychological barriers and enabling investment with smaller amounts.
The effect is evident in initial public offerings (IPOs) and subsequent splits: company stocks surge to hundreds of dollars, followed by a split that triggers a second wave of retail demand, stimulating further price increases.
Price Psychology
The price of stocks exerts a powerful psychological influence. Investors tend to focus more on the absolute value of the price rather than percentage changes. Stocks priced at 100 ₽ seem more "affordable" and "attainable" than those at 1000 ₽, even if the fundamentals are identical.
After Apple's 4-for-1 split in 2020, not only did small investments increase, but the average position volume in institutional portfolios became more balanced, ensuring a sustainable upward trend.
3. Procedure for Conducting a Split
Board of Directors and Shareholders
The split plan is developed by the company's CFO and approved by the board of directors. It is then ratified at an extraordinary or annual shareholders' meeting. The minutes specify the split ratio, dates, and notification procedures.
In different jurisdictions, the process may vary: in the U.S. and Europe, approvals and announcements take a few days, whereas in Russia, it may take several weeks due to additional regulatory approvals.
Registration and Publication
Upon approval, the documentation is submitted to the regulator: the company files a package of documents, including the updated charter and the decision from the meeting. The exchange publishes information about the split and recalibrates trading parameters: total shares, capitalization, and historical charts.
Announcements are made in official sources, on the issuer's website, and in the press. An essential requirement is to notify market participants 10–30 days before the split date.
Technical Adjustment
Stock exchange terminals and broker platforms update their databases: the old price is divided by the split ratio, and the number of shares is multiplied by the same ratio. Traders need to restart their platforms or refresh their data to see the new quotes.
On the day of execution, trading begins with new parameters without pauses or disruptions, which enhances participants' confidence in the process.
4. Impact of the Split on Investors and Portfolios
Percentage Stake and Portfolio Value
After the split, the investor's percentage stake in the equity capital remains unchanged: 100 shares out of 10,000 before and 500 shares out of 50,000 after the split both equate to a 1% ownership. The total value of the portfolio does not change, as the price is adjusted proportionately.
It is crucial to note that nominal changes in the portfolio should not be confused with real changes—this is a purely technical procedure that does not impact the fundamental valuation of the company or its future cash flows.
Dividends and Payments
If a company pays dividends, the payout per share decreases proportionately due to the split, but the total payout to the holder remains the same. For example, in a 4-for-1 split, a dividend of 4₽ per share turns into 1₽ for the new share.
For an investor, it is important to understand that the cash income does not change—the only modified aspect is the "unit of measurement" for dividends.
Updating Technical Analysis
Historical charts are automatically recalibrated, but traders often need to revisit support and resistance levels and gather additional data for indicators to ensure that signals remain valid post-split.
For accurate analysis, it is advisable to verify the recalibrated data on platforms and consider potential discrepancies due to rounding when dividing prices.
5. Reverse Split and Consolidation of Shares
Share Consolidation
A reverse split is the opposite operation of a split: several shares are combined into a single, more expensive one. For example, in a 1-for-10 split, 100 shares priced at 10₽ become 10 shares priced at 100₽.
This procedure is often conducted to comply with minimum stock price requirements for maintaining listing on an exchange. However, it does not change the fundamental value of the company.
Motives for Consolidation
The primary motivation is to avoid delisting when the stock price falls below a specified threshold. Investors and regulators often view very cheap shares as "penny stocks," forcing companies to consolidate.
A reverse split is frequently perceived negatively by the market as it signals financial issues and declining investor interest in the issuer's stocks.
Risks for Investors
A reverse split may create an illusion of growth, but without business improvement, the risk of further decline remains high. Investors should carefully analyze fundamentals before participating in such operations.
Moreover, after consolidation, liquidity may deteriorate, as more expensive stocks are less accessible to retail traders.
6. Impact on Liquidity and Market Metrics
Increase in Trading Volumes
After a split, trading volumes often increase, as new shareholders actively trade in the cheaper securities. This can reduce volatility and smooth out price fluctuations.
Narrowing Spreads and Market Depth
As the number of active orders at lower prices increases, spreads contract, and order books deepen, positively impacting the execution of large orders.
The market depth—the number of orders at various levels—grows after a split, making sharp price shifts less likely and improving the experience of executing large volumes.
Widening the Investor Base
Cheap stocks attract more small investors and beginners, promoting demand diversification and reducing concentration of large positions. This enhances the resilience of stocks against single large orders.
7. Historical Examples and Case Studies
Apple and Tesla
Apple executed a 4-for-1 split in August 2020, during which its stock rose by 12% over the month, and trading volumes doubled. Tesla conducted splits of 5-for-1 in 2020 and 3-for-1 in 2022, drawing numerous new retail investors and supporting further price growth.
Sberbank and Yandex
Sberbank split its shares 10-for-1 in 2007, improving the stock's accessibility and liquidity. Yandex carried out a 20-for-1 split in 2015, expanding its shareholder base and increasing activity on the stock exchange.
Lessons from Reverse Splits
VTB executed a reverse split of 1-for-15 in 2024, but without fundamental improvements, the stock price continued to decline, highlighting the limited impact of consolidation without changes in business operations.
8. Investment Strategies for Splits
Buying Before the Split or Waiting
Before a split, stocks often increase in price due to expectations of heightened demand. Investors can profit from purchasing before the split, but there is higher risk if fundamental indicators or market expectations change.
Recalibrating Technical Analysis
After a split, it is necessary to update support/resistance levels and indicators, as historical charts are recalibrated. Relying on old values without verifying data accuracy is inadvisable.
Long-Term Approach
For long-term investors, a stock split is a technical procedure that does not alter the company's prospects. Decisions regarding buying and holding should be based on fundamental indicators and the company's development strategy.
Conclusion
A stock split is an effective tool for enhancing liquidity, broadening the investor base, and improving market metrics. A correct understanding of the mechanics, objectives, and consequences of splitting is important for both issuers and investors. A reverse split often signals company issues and requires careful evaluation. When effectively utilized, splits contribute to capital growth and strengthen the issuer's market position.
