- How are existing positions affected by a stock split?
- Trading timings after a split
- MT4 ( Market orders, Pending orders )
- MT5 ( Market orders, Pending orders )
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 are existing positions affected by a stock split?
As a result of a stock split, the number of outstanding stocks is increased with a proportional decrease in their value.
For example 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 shares will be quadrupled.
Let us look at an example to understand this better:
A client holds 200 shares in a company, which are trading at the rate of USD 800 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) = USD 200 per share
Trading timings after a split
In general a split is expected to cause a gap on market opening and a general increase in volatility. 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.
The time interval might be increased if abnormal market conditions are observed after the initial 15 minutes.
How is a stock split reflected on the trading platform?
MT4
Let us take a look at how the positions held by a trader are reflected in the MT4 trading terminal:
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.
a. If the newly opened order’s volume exceeds the maximum volume for an order, multiple orders are opened.
b. New orders' opening price is 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 split.
MT5
Now let us take a look at how the positions held by a trader are reflected in the MT5 trading terminal:
Market orders
After a split, the following changes take place on MT5:
- Two deals will be applied to an existing position.
a. The first deal ‘cancels’ the result of the position by having the same price as the opening deal but opposite direction.
b. The second deal adjusts position 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.