What is a Stock Split and How is it Processed?

This article introduces the concepts of stock splits and reverse stock splits, as well as the process time for these actions in the US and Hong Kong stock markets. Understanding these concepts will help you better comprehend changes in share quantity and price, along with relevant market operation rules during your investment.

1. Stock split

A stock split is also known as a share split. When a stock's price has risen so much that it may reduce trading volume and discourage investors (especially retail investors) from participating, the company may consider a stock split. After the split, the equity of each investor and the company's market capitalization remain the same, but the number of shares held increases. During the stock split process, a temporary stock symbol may be assigned, but the original symbol will be used afterward.

Example:

Tencent Holdings Ltd (00700) executed a 1-for-5 stock split on May 15, 2014. If you held 100 shares, these would be split into 500 shares. The market price per share decreased, leaving the overall market value unchanged.

Before the stock split: 100 shares × HKD 120 = HKD 12,000

After the stock split: 500 shares × HKD 24 = HKD 12,000

The market price per share decreased to HKD 24, making the stock more affordable for retail investors and potentially boosting market liquidity.

2. Reverse stock split

A reverse stock split is the opposite process of a stock split. When the share price is low, listed companies might consolidate their issued shares (merge multiple shares into one) proportionally to enhance their image. After the reverse stock split, the price per share increases proportionally, while each shareholder's equity and the company's total market capitalization remain unchanged, although the number of shares held decreases.

3. Process time

• US stocks: The entire stock split or reverse split process is typically completed before the pre-market hours on the effective date of the stock split/reverse split provided by the exchange. Split or consolidated shares can be traded in pre-market hours.
• Hong Kong stocks: The stock split or reverse split and changes to temporary stock codes are processed after the market closes on the effective date of the stock split/reverse split provided by the exchange. Trading in the split or consolidated shares begins at market open on the next trading day.

Disclosures

This article is for reference only and does not constitute any investment advice.