What is a Stock Split and How is it Processed?
Stock Split
A stock split, also referred to as a "stock divide", occurs when a company' stock price becomes relatively high, potentially deterring investors (particularly retail investors) from buying the shares. To address this, the company may choose to split its stock, which maintains the total equity of shareholders and the overall market capitalization, while increasing the number of its outstanding shares. A temporary stock symbol may be issued during this process, but it will eventually revert to the original symbol.
| Example: |
On May 15, 2014, Tencent Holdings Ltd. (00700 TENCENT) executed a 5-for-1 stock split. If an investor held 100 shares before the split, they would hold 500 shares afterward. Although the price per share dropped, the total market value remained consistent.
Before the split: 100 shares * 120 HKD = 12,000 HKD
After the split: 500 shares * 24 HKD = 12,000 HKD
This reduction in price to 24 HKD per share makes it more accessible to retail investors, thus enhancing market liquidity. |
Reverse Stock Split
A reverse stock split is the opposite of a stock split. When a company's stock price is relatively low, it may decide to consolidate its shares to improve its market perception. After a reverse split, the price per share increases proportionately, while the total equity of shareholders and overall market capitalization remain unchanged. However, the number of shares held by shareholders decreases.
Processing Time
US stocks: On the effective date specified by the stock exchange, the stock split or reverse stock split will be completed before the pre-market trading session begins. Adjusted shares will be available for trading in that session.
HK stocks: The stock split or reverse split, along with any temporary stock symbol change, will be finalized after the market closes on the specified effective date. Adjusted shares can be traded during the next session.