Share Consolidation: Profit or Loss? 4 Must-Know Facts!
Share consolidation is the merging of shares.
It is a corporate action that combines several units of shares into one unit.
With this action, the total number of shares in a company becomes smaller. However, the share price adjusts proportionally upward to compensate.
There are 4 important pieces of information you need to know about share consolidation.
1. Ex-date
You must know the Ex-Date of the share consolidation. Do not look at the Entitlement Date. The Ex-Date is the date when the share consolidation takes effect.
2. Calculation method
You must know the consolidation ratio. This means how many units will be combined into 1 unit, because share consolidation itself means merging share units into 1 share unit.
3. Know how many units you can sell
On the Ex-Date, you need to know how to calculate.
For example, Share Consolidation of Stock A is 1:50. Say you bought 10,000 units. On the Ex-Date, those 10,000 units will become only 200 units because 1:50 means 10,000 units are divided/consolidated by a ratio of 50.
So the share units you now own are only 200 units.
4. Penalty for selling excess share units
Many people overlook this and some may not even know that the new number of share units is 200 units, not 10,000 units anymore.
So you should only be able to sell 200 units, not the 10,000 share units.
Can you trade the stock after the ex-date?
Scenario 1: Abu did not buy any share consolidation stock before the Ex-Date, so Abu has no issues and can trade as usual.
Scenario 2: Ali bought the share consolidation stock one day before the Ex-Date. Ali wants to sell on the Ex-Date — no problem. However, he must sell according to the correct number of units after the consolidation.
What happens if you oversell?
If share units are sold in excess of the actual amount owned, the excess units sold are considered Short Selling.
Short Selling is an investment strategy that involves selling first, then buying later.
As a penalty, the excess share units sold must be bought back to make up for the shares not owned.
This is to replenish the share units that should have been consolidated on the Ex-Date.
What happens if you don''t buy back?
The consequence is you will be subjected to Buying-in. In this case, Bursa will carry out the Buying-in process.
This process involves Bursa purchasing the share units at 10 bids above the last price or the closing price on that day, whichever is higher.
This means you essentially need to buy back the shares at a price 10 bids higher to complete your share ownership so it can be sold to Bursa.
Example scenario
For example, Ali bought 30,000 units of Stock A at RM 0.035 before the Ex-Date.
Then on the Ex-Date, with share consolidation at a ratio of 1:50, the price rose to RM0.30.
Ali sees that if he sells now he can make a big profit: (RM0.30 x 30,000) – (RM0.035 x 30,000) = RM 7,950.
But wait!
In reality, Ali oversold because the share units Ali can sell are only 600 units (30,000/50) due to the 1:50 share consolidation.
So here, Ali has already shorted 29,400 share units.
Ali must immediately buy back these 29,400 units. If Ali doesn''t buy them back, Ali will be penalised.
The penalty is that those 29,400 units must be bought at the closing price on that day plus 10 bids.
For example, the closing price that day is RM0.40. With an additional 10 bids, Ali is penalised to buy back at RM0.45.
So the total penalty amount for Ali is RM0.45 x 29,400 = RM13,230.
Now let''s calculate how much Ali actually lost.
1. Bought 30,000 units x RM0.035 = RM 1,050
2. Sold all 30,000 units x RM0.3 = RM 9,000
3. Supposed profit RM9,000 – RM1,050 = RM7,950
4. Penalty RM 0.45 x 29,400 = RM13,230
5. Loss RM13,230 – RM7,950 = RM 5,280!!!
Firstly, you can check on your trading platform. When you log in on your phone, you will notice a popup Alert Message about Share Consolidation or Rights Issue or other corporate actions.
Secondly, you can visit the Bursa Malaysia website at www.bursamalaysia.com for the latest information.
Watch our video on the risks of Share Consolidation that we have prepared as additional information so you can better understand share consolidation.
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