Splitting up And consolidation valuable papers (split and, respectively, reverse split) – Procedures, quite often used in the practice of exchange turnover, which are resorted to as small businesses, and large corporations. About that, why companies conduct split, what consequences this entails and how to make money on it for a private investor - we explain in this article.
What is a split of shares
Stock split (translated from English as paper crushing) – this is an increase in the number of securities of the issuing company, circulating on the market, by reducing their value with constant capitalization.
Why do you need a split
Each developing company is interested in the inflow of additional funds, and this directly depends on attracting a large number of investors. But not everyone trader or even an investment fund can afford to buy even promising ones., but very expensive shares of a growing company. Therefore, such a company divides the increased price of its shares by a certain coefficient.. As a result, the number of papers increases, and their proportionally reduced cost becomes more attractive to the retail customer.
When to conduct a split
The need to split financial instruments arises, usually, at two stages of enterprise development:
- Abandoning bank lending, the firm produces financial instruments for startup co-owners at a very high price. But then, because of the need for additional capital investment, it has to issue securities., which will be traded on the stock exchange. Consequently, for the initial public sale of securities to any unlimited number of persons (IPO) have to apply stock split.
- Subject to the constant growth and development of the issuing company, the value of its securities will also constantly increase., which in the end will also push for a split to increase the attractiveness and accessibility of shares for a wider audience of investors..
IPO (Initial Public Offerings) means the first public sale of shares of a joint-stock company to an unlimited number of persons. The sale of shares can be carried out both by placing an additional issue of shares by open subscription, and as a result of the public sale of shares of the existing issue.
What does the crushing procedure look like?
Splitting up (split) Shares, in accordance with Russian legislation and market rules, occurs in the following order:
- Proposal for crushing of financial instruments is recommended for consideration by the Board of Directors.
- The decision on the split of securities is approved by the shareholders at the general meeting by a majority of votes.
- The Board of Directors decides on the issuance of additional investment documents.
- The necessary documentation is submitted to the Bank of Russia and the issue is registered.
- Valid securities are converted to those issued on the appointed date.
- The report on the results of the emission process is registered in the Bank of Russia Financial Markets Service.
- The charter of the issuing company is amended by the number of investment documents and their nominal value.
Is considered, that the split has no impact on the economic activity of the enterprise, since its capitalization remains unchanged. This procedure is somewhat similar to the denomination., which is well remembered by former citizens of the USSR. New denominational banknotes with more or less zeros appeared, but they could pay for the same amount of goods or services. Similarly, in the case of a split, the number of securities increases by a certain coefficient., however, their cost is reduced in the same proportion..
Help. Рыночная капитализация компании-эмитента – this is the total value of all its financial instruments, calculated on the basis of the current exchange price.
Consequences of the split for shareholders
For the holder of shares of the issuing company, enterprise stock split, there will always be two positive psychological moments:
- Increase in the number of securities;
- Confidence in that, that the company is on the right path of economic development.
Attention! Некоторые корпорации специально удерживают высокую цену на финансовые инструменты, to emphasize the closeness of their enterprise to low-level speculators, even incurring some losses.
The impact of the split on the share price
After a public announcement of the planned split, the share price may change, but for permanent holders of securities this is not essential. When conducting a split of shares, the company bears mandatory costs, which are compensated by a post-split increase in the value of securities for new investors.
Impact on investment returns
As a result of the share split, the invested amount will remain unchanged. The number of financial instruments will increase, and their cost will decrease accordingly.
Help. Под доходностью инвестиций подразумевается процентное увеличение или уменьшение инвестированной суммы за какой-либо временной промежуток.
Examples of split
For examples of forced split due to the increase in the value of securities do not need to go far. IN 2020 the year split was held by two largest and most famous companies - Apple Inc. and Tesla.
For “Apple” corporation is the fifth fragmentation of financial instruments. The first four were held in 1987, 2000, 2005 And 2014 yy. This time the proportion was 4:1, which allowed Apple to increase the number of shares on the stock market four times, and reduce their price from $400 to $100. The company from Cupertino thus achieved two goals at once:
- The price reduction made the paper more affordable and attracted the attention of the mass investor to it.;
- The share price now does not stand out so much among other companies., included in the Dow Jones Index.
Tesla had it as its first split., the proportion was chosen in the ratio 5:1 (Recall, that the company's shares have risen since the beginning 2020 years approximately on 295 %).
However, there are examples of companies., do not want to spend money on high administrative costs for stock split and trade shares, the cost of which exceeds 1 000 Dollars. This, for example, Amazon.with, the value of securities of which in September 2020 G. on average exceeded $3 000 for pike, and Alphabet (Controls Google Inc) – about $1 500 for paper for the same period.
How to find out about split
Any company, decided to break up the shares, posts this news on its website. Investor, having securities of this issuer, must be informed by a notification from the broker, with whom he cooperates, by phone or internet. But for active traders, stock split data is easiest to get on special disclosure sites..
How to make money on split
It should be noted right away, that there is no special strategy in trading split shares, since the price of financial instruments is very different from different companies, so at different stages of the split.Therefore, traders buy securities at the next stages of stock split:
- Before the announcement of the split, watching the acceleration of stock growth, leading in their industry economy;
- After the date announcement;
- On the day of securities splitting;
- During “recreation” exchange market after stock split on price rollback (it is during this period that you can earn with minimal risks).
But for successful trading, every investor before, how to choose a company, intending to split shares, seriously studies the economic activity of this issuer.
What is a reverse split?
Reverse split (consolidation of shares) – it is an emission operation of a joint-stock company, as a result of which several previously issued securities are converted into one new share of the same type. This operation is not carried out by the company so often. Sometimes consolidation is carried out when several companies merge to average the price of financial instruments. In most cases, the reverse split indicates problems in the issuing company. Some exchanges set a lower limit on the value of securities, and the company, who does not have the opportunity to increase the share price by other means, for that, to stay on the market, have to go to the reverse split.
Little of, that this procedure requires additional funds, it also undermines investor confidence. As a result, share consolidation, increasing cost, may be replaced by a drop in demand for financial instruments and their further depreciation.
Summing up, Note, what split, usually, is a consequence of the dynamic growth of the company and the corresponding increase in the value of its securities. For a long-term investor, this is, usually, neutral factor, but in some cases, the split allows you to get additional profit. For example, as a result of that, that split increases the attractiveness and availability of securities for a wider range of investors, which can be a catalyst for a new stage of growth. But reverse split or consolidation, caused by a fall in the value of securities, gives reason to think – perhaps you should not become an investor in this company.