Securities splits and consolidations (including reverse splits) are significant corporate events that result in changes to both the value of shares and the number of shares in circulation.
A split allows a company to make its stock more attractive to new investors and increase trading volumes. High-priced stocks can discourage retail investors, who may find it difficult to build a portfolio and distribute risks efficiently. For this reason, companies split their stocks to reduce the price of one share while proportionally increasing the number of shares.
For example, on June 10, 2024, NVIDIA Corporation (NVDA) executed a 1:10 stock split. The price of one NVDA share changed from $1,200 to $120. The company's total capitalization remained unchanged, as the number of shares increased tenfold.
*If you held a position in the market for NVDA, buying 1 lot at a price of $1,200 per share, then after the split, your position in the trading terminal will be reflected as NVDA buy 10 lots at a price of $120.
Thus, the value of the position in the market at the time of the split does not change; only the number of lots and the opening price change. The financial result for the position, the commission for its opening, and the collateral will remain the same as before the corporate event.
Consolidation is beneficial for the issuing company because it can enhance its image; a low absolute share price does not always attract a broad range of investors. A reason for consolidation may also be compliance with exchange requirements for maintaining listing status.
For example, on January 24, 2024, the shares of the United States Natural Gas Fund LP ETF (UNG) were consolidated at a ratio of 4 to 1. Four shares valued at $5 each were combined into one share valued at $20. The total capitalization of the company did not change, as the number of shares decreased by four times.
*If you held a position in the market for UNG, selling 4 lots at a price of $5 per share, then after consolidation, your position in the trading terminal will be reflected as UNG sell 1 lot at a price of $20.
Thus, the value of the position in the market after consolidation remains unchanged; only the number of lots and the opening price change. The financial result of the position, the commission for its opening, and the collateral will remain consistent with those before the corporate event.
It is important to consider that fractional shares may result from a reverse split. This occurs when the volume of a market position or a pending order is not a multiple of the reverse split ratio.
For example, if you have an open position of 1 lot (equivalent to 1 share) and a reverse split of 4:1 occurs, your position volume after the corporate event will be 0.25 shares. Since trading on exchanges occurs only in whole units of securities, such a position cannot be hedged by FXOpen with an external counterparty at a volume of 0.25 lots and will be closed by the broker at the closing price on the day before the corporate event.
Splits and consolidations also affect pending orders such as Buy Stop, Buy Limit, Sell Stop, and Sell Limit. The volume and price of such orders will be adjusted in multiples of the split or reverse split ratio. The Stop Loss and Take Profit price levels will also be adjusted accordingly. Additionally, pending orders may be canceled by the broker if fractional volumes occur.