Stock Split

A stock split (also: forward stock split) describes the conversion of existing shares into a bigger number of new shares with a then lower nominal value per share. Technically this is the exact contrary of a share consolidation (also: reverse stock split). 

Which Board Decides About A Stock Split?

The decision for a stock split can only be taken during an official shareholders' meeting. A stock split does not change the ownership structure of one company. Its consequences are therefore sometimes described as mainly psychological. The value of a single share is either increased or decreased without changing the equity of the company or the total value of the total number of shares of one investor. 

Who Can Decide About A Stock Split

No stock split can be performed without the approval of the shareholders. Therefore the decision about a stock split has to be put on the agenda of a general shareholders' meeting. The simple majority of the vote is required to pass a stock split. 

Stock Split Consequences

In most cases one would expect a price slump as a consequence of a stock split decision. Similar to a dividend payment. For example a 1:2 stock split - 2 new shares for 1 old shares - would lead to a halving of the nominal value of the shares. This could lead investors into the assumption that the stock market price of one share has lost 50%. To avoid such confusion most programs and webplatforms adjust the stock market price according to the stock split ratio. Most systems clearly show the point of time when the stock split happened. Same for the trading volume that would otherwise artificially simply double. Investors should therefore be very careful and double check all data as stock splits that are not clearly marked in a historic chart might lead them into wrong or inaccurate assumption about the past development of one share. 

Psychological Effects

In many cases stock splits are considered as a sign of strengths as the stock market price of one share has risen a lot in the past prior to the split. After the stock split the share then looks cheaper nominally. The share therefore becomes easier to be traded. Consequently the share will look attractive for a wider group of potential investors. This might in the mid- and longterm support the development of the stock market price of one share. 

Stock Split And Stop-Loss-Orders

An other important point has to be considered. As a consequence of a stock split nominal prices of a share will decrease. This might actively trigger stop-loss-orders. In this case many investors at the same time will sell their shares via automatic computer systems. This can then lead into a fast and unstoppable price slump. Fortunately this does not happen in reality. To avoid such uncontrolled price slumps banks and brokers cancel all stop-loss orders prior to the stock split. 

Tax Consequences of Stock Splits

For basic and simple stock splits no tax consequences will appear. As long as the ISIN remains the same after the split it does not lead into any additional tax burden.