TMX Group (NASDAQ: TMXXF) (TSE: X) shares drop 80% at the open today. This is not one of those disasters that sometimes afflict smaller and more speculative stocks - this is the exchange itself making a planned move. This is also not a change in actual values, this is a purely nominal price change. For what is happening here is a stock split. Rather less common than the reverse stock split but it does happen. It's also a sign of success - which is a bit weird for a slashing of a price to only 20% of its former level but there we are.
TMX itself is the Canadian stock exchanges - the equivalent of the London Stock Exchange company, or NASDAQ perhaps. It's doing well, the share price has gone up, therefore they're doing something about that. At which point we get to a bit of a mystery, why would they want to do something about that? What is this idea that a share price, in terms of the numbers used to describe it, is too high? Or even, as more often happens, too low?
TMX Group share price from NASDAQ
The answer is that it's just one of those things. Humans can be subject to the number illusion. We just have in our heads some idea of what a “right price” is. Something outside that range can seem too expensive - so we buy less of it - or too cheap so we buy more. As far as we know this applies to stock prices. More importantly, companies on stock exchanges act like it applies to stock prices. So, when a stock price appears “too low” they will do the more common reverse stock split, or consolidation. If above that “right price” range then the stock split, as here.
Simply declare that what was one share is now 5. As this doesn't change the value of the whole company this means the corresponding other change, to make it balance, must be in the price of each share.
That this is just fashion is shown by the fact that that “right range” seems to be different on different markets. In London it tends to be £1 to £10 that is considered about correct. On N American exchanges, $10 to $100. But it's that particular range that is the fashion - everyone agrees that we humans are subject to the number illusion.
So this stock split is just because TMX has been doing well, the stock price is above what is considered the right range and a purely nominal change is made to correct that. The deeper point here is that we humans are not entirely rational in our thinking about prices.
