Ask Colin

What is the typical process for a share split and how does it affect the price of the shares?

It is a long time since I have held a share that was split. However, what I think would happen is this: 

  • Company would make an announcement to the ASX. An Ex date would be included in the announcement.
  • It would probably be reported in the AFR.
  •  If the shareholder had opted for electronic communications, they may get an email from the company. 
  •  The company would, I think advise other shareholders by mail.
  •  The split shares would start to trade from the opening of business on the Ex date. I think all orders still open the night before would be purged by the ASX.
  • Broker sponsored shareholders would receive a CHESS statement at the end of the month in which the split takes place.
  • Issuer sponsored shareholders I have no experience with, but should be similar.

If the shares are quoted at $10 at the close before the Ex date and the split is 2 for 1, then the theoretical Ex price is $5. In other words, in theory nothing has changed except the number of shares.

However, there could be something that changes sentiment overnight and the opening price may be a bit above or below $5.

The usual reason for splitting shares is to bring the price back to a normal range. The split also increases the apparent liquidity of the stock and may bring in more trading. Also the lower price means slightly greater volatility  a 1c price change on a $5 share is a larger percentage than a 1c price change on an $80 share. Some people believe that split shares will trade at a higher price than the equivalent number of pre-split shares, albeit this appears to be quite irrational. However, this is a very complex situation and it is difficult to unravel a dynamic situation to separate out the individual influences on the price.

An example you might like to look at is Fortescue Metals Group.