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Stock Split (Share Split)

 

Definition of a Share Split

 

A Company can decide to increase the amount of its outstanding shares while at the same time decreasing the nominal share price proportionally.

 

 

Example 1: a 4 for 1 stock split (from a issuer's point of view)

BEFORE THE STOCK SPLIT:

Amount of outstanding shares: 1,000,000

Nominal value per share: EUR 0.50. 

Total nominal value of the company: 1,000,000 x EUR 0.50 = EUR 500,000

AFTER THE STOCK SPLIT

Amount of outstanding shares: 4,000,000

Nominal value per share: EUR 0.125

Total nominal value of the company: 4,000,000 x EUR 0.125= EUR 500,000

 

Example 2: An investor experiences a 4:1 stock split (from an investor's point of view)

BEFORE THE STOCK SPLIT:

A shareholder holds 500 shares of company ABC

Nominal Value per share: EUR 0.50

Market Value per share: EUR 0.60 (this is an assumption)

Total value of his holdings: 500 shares x EUR 0.60 = EUR 300

AFTER THE STOCK SPLIT:

The shareholder holds 2000 shares

Nominal Value per share: EUR 0.125

Market value per share: EUR 0.15 (the market value of the shares does not have to equal the nominal value of the shares)

Total value of his holdings: 200 shares x EUR 0.15 = EUR 300

 

                                                      

Example 3: What Would you prefer?

 

 

1 share's worth before the stock split

 

OR

 

 

10 share's worth after the stock split

 

 

Stock Split - Why companies split their shares

 

A Company may try to

 

* Increase liquidity (100 shares of USD 2,00 are easier to trade than 1 share of USD 200)

 

* Increase their perceived attractiveness for small investors

 

* People believe that it has a psychological effect

In itself a stock split can only be called after a period during which a company has performed very well - leading to a rise in the share value. In that light a share split can be seen as an accolade that the company gives itself.

It is believed that it is a signal that the board of directors believe that the company is going to perform well in the future.

 

* Some people believe that share splits will result in higher share prices (although this is never proven)

 

* Make itself better comparable with its peergroup (ie other companies in the same industry who's shares are trading at lower prices)

 

 

Effects:

 

A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share's portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements).

 

Preconditions:

 

A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board's proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.


 

Stock Split - Transformations of Open Trades

 

DATES FOR TRADING

 

When trading securities in general, an investor needs to consider 3 dates:

 

  • Trade date

the date at which the securities change legal ownership

  • Contractual settlement date

the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.

  • Actual settlement date

the date at which the trades actually get settled (should in theory be the same as contractual settlement date)

 

This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares acually fysically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle.

 

The most common forms of settlement cycles are:

T+2: The contractual settlement date is 2 days after the trade date

T+3: The contractual settlement date is 3 days after the trade date

 

DATES FOR STOCK SPLITS

 

When dealing with transformations on stock splits, an investor needs to consider 2 dates: EXDATE and RECORD DATE.

 

The EXDATE is the date at which the shares are trading at post split prices.

The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to.

 

Depending on the market (country) the dates will be set in different ways. There are two main principles:

  • Exdate driven markets
  • Record date driven markets

 

In Exdate driven markets, the exdate will be after the record date.

In Record date driven markets, the record date will be after the exdate.

 

When combining the settlement cycles with the different market principles there are several possible scenarios. Please see below the main ones.

 

Change of ISIN

 

On some occassions the ISIN will change along with the ratio being applied - it can also remain the same.

 

 

SCENARIO 1 Settlement cycle is T+3 and Market is RECORD DATE driven:

 

In this Scenario the Trader A buys the shares before the exdate of the stock split event and will therefore purchase at pre split quantities, ISIN and prices. The shares will settle into his account on the RECORD DATE. The custodian will look at who has the shares at close of business on the RECORD DATE and will affect the payments one day later accordingly (in this case to trader A). There is no trasforming of trades involved.

 

 

Example worked out:

Split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.50

Nominal value per share post split: EUR 0.05

Market price per share Pre-split: EUR 3.00

Market price per share Post-split: EUR 0.30

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the stock split. The trades settle on the record date. On record date +1 the custodian will debit the 100 shares NL00B10RZP78 from Trader A's account and credit him with 1000 new shares NL0000488639. No transformations of the trades is required.

 

 

 

SCENARIO 2 Settlement cycle is T+3 and Market is EXDATE driven:

 

 

 

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split prices, quantities and ISIN (let's assume that there is a change of ISIN). Trader B, however, will hold the shares in his account at close of business of the RECORD DATE and the custodian will debit the pre-split ISIN, quantities and credit the post-split ISIN and quantities from and to Trader B. As a consequence, the pending trades that both traders have alledged against eachother on the old ISIN, quantities and prices must be cancelled and re-instructed on the post-split ISIN, quantities and prices. The process of cancelling old trades and re-instructing is called transforming trades.

 

Example worked out:

Stock split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.50

Nominal value per share post split: EUR 0.05

Market price per share Pre-split: EUR 3.00

Market price per share Post-split: EUR 0.30

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-2 of the stock split.

Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00).

Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00).

The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1000 new shares NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied.

Trader A has to re-instruct a Receive versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30).

Trader B has to re-instruct a Delivery versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30).

(Please note the total value of the shares does not change)

 

SCENARIO 3 Settlement cycle is T+3 and Market is RECORD DATE driven - parent trade settles late

 

 

 

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split ISIN, quantities and price. Since the shares on the parent line are settling late, the trades that the two traders had alledged against eachother need to be cancelled and re-instructed on the post-split ISIN quantities and price (since after the record date no trades on the pre-split ISIN will settle anymore).

 

 

Example worked out:

Stock split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.50

Nominal value per share post split: EUR 0.05

Market price per share Pre-split: EUR 3.00

Market price per share Post-split: EUR 0.30

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the stock split.

Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00).

Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00).

The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1000 new shares NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied:

Trader A has to re-instruct a Receive versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30).

Trader B has to re-instruct a Delivery versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30).

 

 

Conclusion

 

Whenever shares are bought before exdate the buyer will buy the shares at pre-split quantities, ISIN and prices. If the settlement date of the trades between the traders is after the record date of the event, the old trades have to be cancelled and re-instructed on the new ISIN with the ratio applied.

 

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