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What is a (reverse) stock split?

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When a company announces a stock split, it increases the number of shares outstanding. This is achieved without increasing the total market capitalisation. One of the most important parameters of a stock split is its ratio, which represents how many new shares will be issued for each existing share.

For example, in a stock split with a 2:1 ratio, the shareholder receives two shares for each share they hold in their possession.

Why do companies execute stock splits?
One possible goal of a stock split is to increase the liquidity of the share. Companies issue stock splits to reduce the nominal value of one share. The total share capital will be divided over more shares, which would cause the value of one share to decrease. A lower share price can improve the accessibility or desirability of investing in a company, more people are able to trade their shares, which increases liquidity.

A reverse stock split (consolidation) is the opposite of a stock split- investor's shares are consolidated into fewer shares. This result in an increase in the share price and decrease in the outstanding shares, whilst the total share capital does not change.
For example, in a reverse stock split with a 1:3 ratio, the shareholder receives one share for each three shares they held, while the total value of their position remains the same.

Why do companies undergo stock splits?
Companies may conduct reverse stock splits to regain compliance and prevent delisting from major exchanges like the NYSE or Nasdaq. Another reason could be to improve the market perception as very low price might signal financial distress.

Do I need to do anything?
Stock splits and reverse stock splits are mandatory corporate actions. Shareholders of companies, undergoing this type of corporate actions are not given the option to choose whether to participate. Thus, no action by the shareholders is required.

Important Information

  • Please note that any open orders in the product in ex date will be automatically canceled.
  • Fractional entitlements will not be issued. Any fractional shares resulting from your position will be settled in cash.
  • The adjustment will be reflected automatically through a corresponding buy and sell entry, visible in your account statement. This is only the visual presentation within the DEGIRO platform, and it does not imply a purchase/sale, nor does it involve any fees.
  • Post a split or a reverse split, the BEP for your position will be adjusted automatically and will accurately reflect your current profit/loss on the position. 
  • As execution only broker, we do not provide tax advice. Therefore, when filing your income tax return, it is best to check with an advisor or the relevant authorities on how to declare these types of events. More information about this event and the tax implications on the Tax Authority official website.
  • The (reverse) stock split alone does not change the total market value of your position before the (reverse) split.

Examples
Stock splits are a very common occurrence. For instance, we have seen a stock split for Tesla (3-for-1) in August 2022. Apple also has performed various stock splits throughout their history, and our own stock has also been split in a 4-for-1 ratio back in August 2021.
However, not all companies perform stock splits when their share reaches a certain price. Berkshire Hathaway's A-shares have famously never split, even though the share price is the most expensive share in the world, having traded over $500,000 per share.
Note that these examples serve only informative purposes. This may not be considered investment advice.

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