What is a stock split?
A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost their liquidity and reduce prices. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.
How stock splits affect orders
As a result of a stock split, the number of outstanding stocks is increased with a proportional decrease in their value. If the split is 1-4, after the split, each share will be worth one-fourth of what it was pre-split, while the number of company shares will be quadrupled.
A shareholder holds 200 shares in a company, which are trading at the rate of 800 USD per share. If the stock undergoes a 1-4 split, after the split:
Number of shares = 200 x 4 = 800
Value of shares = USD (800/4) = 200 USD per share
Trade timing after a split
Stock splits may result in a price gap at market opening as well as a general increase in volatility for that stock instrument. To protect traders from stop-outs due to unpredictable market conditions, trading on the affected stock is made available 15 minutes after the session opens, to allow prices to settle.
The time interval might be increased if abnormal market conditions are observed after the initial 15 minutes.
Stock consolidation (reverse split)
A stock consolidation is the opposite of a stock split, in which the company merges shares to make their share pool smaller. This is also known as a “reverse split”. The overall number of stocks in the company decreases, along with a proportional increase in their value.
How stock splits reflect on trading platforms
Here’s what to look for on MT4:
Market orders
After a split, the following changes take place on MT4:
- Active market orders will be closed with zero profit while keeping paid commission and accumulated swap values.
- A new order will be created with volume and opening price adjusted according to the split ratio. Order comment will be "[split reopen from #N]" where N is the pre-split closed order.
- If the newly opened order’s volume exceeds the maximum volume for an order, multiple orders are opened.
- The opening price of new orders are rounded down for buy orders and up for sell orders (in favor of the trader).
- Take profit and stop loss for the newly opened order are set to 0.
Pending orders
All pending orders are canceled following a stock split.
Here’s what to look for on MT5:
Market orders
After a split, the following changes take place on MT5:
- Two deals will be applied to an existing position.
- The first deal ‘cancels’ the result of the order by having the same price as the opening but in the opposite direction.
- The second deal adjusts order volume and opening price according to the split ratio.
- Take profit and stop loss for the newly opened order are set to 0.
Pending orders:
All pending orders are canceled following a split.